Party manifesto analysis - video

An introduction by Paul Johnson

Tax by Stuart Adam

Working age benefits and the labour market by Rob Joyce

Spending on public services by Christine Farquharson

The outlook for public finances by Carl Emmerson

Question and answer session

Opening remarks by IFS Director Paul Johnson:

Who knows what to make of party manifestos? When we looked at the manifestos in 2017 we said “the Conservatives would preside over yet more spending cuts” and that their manifesto would mean “another parliament of austerity”. That’s what their 2017 manifesto said, but it is not what has happened. Current public service spending is due to be around £27 billion higher next year than implied by their 2017 manifesto. That’s closer to the 2017 Labour pledge than to the Conservatives’ own manifesto.



Maybe we are in for more of the same. They are not promising any more spending cuts but nor, essentially, are they promising any spending increases beyond those set out in September. Conservative plans if delivered would leave public service spending outside of health still 14% lower in 2023-24 than it was in 2010-11. No more austerity perhaps, but an awful lot of it baked in.



The contrast with Labour’s offer couldn’t be greater. In 2017 we said that “Labour would raise spending to its highest level since the 1980s and tax to record levels in peacetime” and also that they “would increase capital spending dramatically and would accept a much bigger budget deficit than would the Conservatives”. They have doubled down this time around. £50 billion of additional current spending has become £80 billion. A £58 billion promise to the so called WASPI women sits on top of that. Instead of aiming to increase investment spending by £25 billion a year they are now wanting a £55 billion increase. Taxes are not supposed to rise by £50 billion but by £80 billion. Under Labour both taxes and spending would rise to peacetime highs. On generous assumptions they would see the national debt rise by around 3% of national income.

Neither is a properly credible prospectus.



Should they win this time it is highly likely that the Conservatives would end up spending more than their manifesto implies and thus taxing or borrowing more. The chances of holding spending down as they propose over a five-year parliament look remote. Why have they been so immensely modest in their proposals? Because to do otherwise would either mean resiling from their pledge to balance the current budget or would mean being up front about the need for tax rises to avoid breaking that pledge.



Labour would not be able to deliver investment spending increases on the scale they promise. The public sector doesn’t have the capacity to ramp up that much, that fast.



It is highly likely that Labour, at least over the longer-term, would need to implement other tax raising measures in order to raise the £80 billion of tax revenue that they want and even just sticking to those proposals they would clearly increase taxes for many millions outside the top 5%. In reality, a change in the scale and scope of the state that they propose would require more broad based tax increases at some point.



Much of Labour’s manifesto should presumably be seen as a long term prospectus for change rather than a realistic deliverable plan for a five year parliament. Beyond renegotiating Brexit and doubling investment spending, overhauling substantial parts of the tax system and massively increasing day-to-day spending, their plans for widespread nationalisation, increased labour market regulation, changes to corporate governance and effectively transferring 10% of private share capital to a combination of employees and the state, would all be huge and complex undertakings that would all need to be carefully done.



All that said much of Labour’s vision is of a state not so dissimilar to those seen in many other successful Western European economies. Labour’s proposed increase in the size of the state would still leave UK public spending at a lower share of national income than that seen in Germany. Water companies are more often than not in public ownership. And, for example, collective pay bargaining is widespread in many European economies.



Labour’s promise to abolish in work poverty within a parliament is not achievable. Indeed, one of the few relatively modest elements of their manifesto is the limited additional spending on benefits for the working age poor, one area where they are outdone by the Liberal Democrats. They would spend considerably more over a parliament on the so called WASPI women, a group who are relatively well off on average, than the additional sums they are providing to the much bigger group of much poorer working age benefit recipients.



Of course, the deliverability of all the parties’ plans will depend on what happens to the economy. Labour’s Brexit plans would prolong uncertainty but would presumably result in either a softer Brexit than proposed by the Conservatives or in remaining in the EU – though whether that would end uncertainty about our eventual destination must itself be uncertain. Ignoring that last point this would help the economy grow faster under Labour and faster still under the Liberal Democrats. Higher levels of investment spending would also promote growth. On the other hand, big increases in corporates taxes, minimum wages, labour market regulation, and possible uncertainty over property rights associated with nationalisations and the inclusive ownership fund could point in the other direction. One simply cannot say with confidence whether the overall effect of Labour’s plans on growth would be positive or negative. Given the scale of what they are proposing simply assuming that because they want to increase investment, and want a softer Brexit, that growth would be higher is far too simplistic.



The risk for the Conservatives is that their “die in a ditch” style promise to exit the Brexit transition period by the end of 2020 could mean something rather like a “no deal” outcome. That would harm the economy and of course increase the debt and deficit.

Public service spending

Current government policy is that day-to-day public service spending should increase by £34 billion, or almost 10%, between 2019-20 and 2023-24. That in itself is a big change. Manifesto promises are in addition to that. Labour propose to increase current public service spending by an additional £73 billion by 2023-24 taking it to almost one-third above today’s level. The Liberal Democrats propose an additional £33 billion and the Conservatives just £3 billion.



Labour and Liberal Democrats propose significantly more spending than the Conservatives on health and schools, but it is in other areas that the differences are starker. They both propose very big increases in spending on free childcare provision – Labour would double current spending levels on universal free childcare and the Liberal Democrats virtually quintuple them thereby creating a whole new leg of the universal welfare state.



Labour has maintained its commitment to abolish university tuition fees, a policy that would benefit high earnings graduates the most, low earning graduates very little and non-graduates not at all. It would also create pressure to reimpose caps on student numbers.



Labour and the Liberal Democrats have also pledged more money for local government and for social care. Labour’s proposal to make personal care free for all would be expensive – around £7 billion a year – but would still not insure people against the potential catastrophic costs associated with need for long term nursing care. The Conservatives have failed to come up with any kind of plan or any kind of money for social care. Their promise that nobody would need to sell their house to pay for social care would appear to be little more than an uncosted aspiration.

Welfare spending and the labour market

Considering the scale of increases they propose on public service and investment spending Labour’s proposals on working age welfare spending are relatively modest, undoing only just over half the cuts implemented since 2015 and less than a quarter of those put in place since 2010.



Conservative proposals appear to be all but non-existent, though the continued roll out of Universal Credit, a benefit that will be received by more than a quarter of working age households, is of course a big ongoing change in itself.



Labour say that they would abandon Universal Credit altogether and replace it with a new benefit system, but provide no details or costings. Whatever the merits of Universal Credit another complete redesign of the working age benefit system would be unwise. It would be expensive, disruptive and unnecessary. There are plenty of elements of Universal Credit that can be changed to make it more generous and easier to cope with for claimants. Change it, improve it, rebrand it, but for goodness sake don’t put the system and claimants through another decade of turmoil by starting afresh.



Labour’s policies do not come close to being enough to deliver on their pledge to end in work poverty within a single parliament. Laudable though that aim is it is hard to imagine any set of policies which could deliver on such a pledge over such a short period. Their proposed benefit changes by themselves might reduce in work poverty from 18% of people in working households to 16%. Even their radical minimum wage policies would make remarkably little difference. Only about 10% of the extra cash paid to low earners would go to workers in poverty.



In the longer term though it does seem likely that the overall effect of Labour’s policies on taxes, welfare, minimum wages and sectoral collective bargaining would be to reduce labour market inequality and hence in work poverty, possibly risking slower increases in average earnings.



All three parties remain committed to being relatively generous to pensioners – maintaining the triple lock, and retaining winter fuel payments and free bus passes. Labour want to restore free TV licenses to the over 75s. No party is suggesting any serious attempt to tax the wealth tied up in the houses or assets of this group, or to recoup anything from the extraordinarily generous tax treatment many have enjoyed on their occupational pensions. There is still no recognition that this is an age cohort which has been extraordinarily fortunate.



In this context Labour’s decision to spend £58 billion compensating the so called WASPI women is all the more extraordinary. While many were not aware their state pension age was rising, and some have clearly suffered hardship as a result, the decision was taken at least 15 years before the increase in pension age and most in the group are relatively well off. To believe the whole group should receive compensation is a recipe for complete stasis in policy. How can you ever defend any policy which ever makes anyone worse off if you think this change in pension age, implemented with 15 years notice, designed to equalise treatment between men and women, and in the face of dramatic increases in life expectancy, is in some sense unethical? Clearly some suffered hardship and there may be scope for much more limited compensation. Communication should have been far better, and policymakers need to take note of that and act on it for future change.



Labour’s pledge to keep state pension ages at 66 and not increase them further as currently legislated is another expensive promise likely to mean another one per cent of national income being diverted towards pensioners in decades to come, and ensuring that an ever increasing fraction of life is spent in retirement.

Taxes

Again, there is little to say about Conservative proposals. They have very few beyond a small cut in National Insurance Contributions and an ill-advised promise not to raise rates of income tax, NICs or VAT. As with their lack of proposals on spending, if you think things are pretty much OK as they are, then you will like the Conservatives proposals for tax and spend. If you want big increases in taxation and spending then Labour and Liberal Democrats have plenty to offer.



While much has been made of Labour’s proposals to increase income tax for those on high incomes this is set to raise only a small fraction of their overall proposed increase in tax. Much the biggest proposals are for increases to corporation tax which, were they to bring in as much revenue as Labour suggest, would take corporate tax revenues to their highest ever in the UK and to among the highest in the developed world. They would also raise effective rates of corporate tax to levels that are high by international standards.



There has to be serious doubt as to whether elements of their corporate tax proposals would raise the sums suggested. The same is true of the proposed Financial Transactions Tax. Proposals to change the taxation of dividends and capital gains are very welcome, and would raise revenue, but again how much revenue is highly uncertain, though it is less clear in this case that Labour are being optimistic – the revenue effects of these changes are just very hard to estimate.



All other countries which tax and spend on the scale that Labour proposes have tax systems which levy more tax on the average worker than we do. Liberal Democrat proposals to put a penny on the main rates of income tax would be simple, progressive and would raise a secure level of revenue. While the Conservatives continue to pretend that tax rises will never be needed to secure decent public services, Labour pretends that huge increases in spending can be financed by just big companies and the rich. In this respect neither Labour nor the Conservatives is being honest with the electorate.



One specific non tax policy from Labour looks a bit like a tax – that’s its inclusive ownership fund under which 10% of large UK companies’ shares would, over ten years, be put into a fund which would receive 10% of dividends or of after tax UK profits. At least three quarters of these payments would go to employees, the rest to government. For firms where all the payments would go to employees this would be like an enforced employee share ownership scheme. In the first instance shareholders (i.e. savers, those with pensions etc) might face a 10% reduction in the value of their investments, but it seems likely that in the longer run companies would adjust by reducing other aspects of workers’ remuneration to compensate. For firms where profits are big enough that the government takes the final tranche this policy would be similar in its effect to raising the corporation tax rate from Labour’s proposed 26% to just over 33%. As well as possibly reducing other aspects of pay this policy could have other unintended consequences – incentivising firms to stay below the large company threshold, to operate as UK branches of foreign companies and to rely more on debt rather than share capital.

Public finances

Given the uncertainty over the actual policies that would be pursued, the actual tax revenues that would arise, and even the timing of policies, it is incredibly hard to make precise statements over the public finance impacts of these sets of policies. Broadly speaking we can say:

• On their stated policies the Conservatives would be borrowing just over 2% of GDP each year going forward, broadly in line with their aim for a current budget balance. This would keep debt fairly constant as a fraction of national income. But, it seems highly likely that they would spend more than they are suggesting in their manifesto, not least as they have a number of uncosted commitments. If, as remains possible, we were not to reach a negotiated settlement with the EU by the end of next year and moved forward without a deal then the deficit would rise very substantially, perhaps to 4% of GDP. Under this latter scenario debt would once again rise sharply as a fraction of national income;

• Labour if they were to raise the tax revenue they want, and if they were to ramp up investment spending more gradually than they suggest, might preside over borrowing of around 4% of national income. This would not quite be compatible with their desire to balance the current budget – their decision on WASPI two days after manifesto launch immediately set their public finance aggregates off target. Debt under these polices would rise as a fraction of national income, even ignoring the debt that would arise from their planned nationalisation programme (which would, after all, also be associated with an increase in public sector assets);

• The Liberal Democrats’ plans would seem to involve somewhat lower levels of borrowing than implied by either Labour or Conservative manifestos, and they would appear to be the only one of these three parties which would put debt on a decisively downward path.

Conclusions



The implication of the Conservative manifesto is that they believe most aspects of public policy are just fine as they are. Little in the way of changes to tax, spending, welfare or anything else. Yes, there are some spending increases for health and education already promised, but essentially nothing new in the manifesto.



Labour, by contrast, want to change everything. Their vision is of a state with a far greater role than anything we have seen for more than 40 years. They would tax and spend more than ever before, putting in place a new universal welfare state with free childcare, free university, free personal care, free prescriptions and more besides; they would impose a swathe of new labour market regulations; their minimum wage would directly set the wages of a quarter of private sector workers; they would nationalise a series of companies whose performance is of vital importance to the UK economy; they would enforce transfer of effective ownership of 10% of large companies from current owners to a combination of employees and government. For good or bad five years of Labour government would involve enormous economic and social change.



In the face of such vast ambition from Labour, one should not forget that the Liberal Democrat manifesto is itself a radical document that would involve a decisive move away from the policies of the past decade.



Rarely can a starker choice have been placed before the UK electorate.



END

General election analysis 2019: Tax

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General election analysis 2019: Working age benefits and the labour

market

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General election analysis 2019: Spending on public services



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General election analysis 2019: The outlook for the public finances

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Note: We have adjusted the figures on slides 11 and 12 on November 29th. The previous version understated headline borrowing in the Labour scenario and overstated headline borrowing in the Liberal Democrat scenario. The adjustment for public sector net debt is more modest and does not change the pattern of the different scenarios.