Pre-Election Briefing – Fiscal Plans analysed by the IFS | HK Wealth

The Institute of Fiscal Studies (IFS) has produced a briefing which explains the fiscal positions and stated objectives of the main political parties.

The government set out plans in the 2014 Autumn Statement to achieve an overall budget surplus of 1.0% of national income by 2019–20. Somewhat unusually, this policy entails a tighter fiscal position in the medium term than is required by the government’s newly-stated fiscal mandate, and it is also tighter than is strictly required by any of the three main UK parties’ proposed fiscal objectives. Therefore, as we approach the general election, all of the three main parties are in a position where they could announce a net loosening relative to the coalition government’s plans and still be on course to meet their fiscal targets. Whoever forms the next government may, of course, wish to build some room for error into their plans and thus choose to aim to overachieve their targets. However, so far none of the three parties has been explicit about how much caution it would want to incorporate in its plans.

page-image-01Although the coalition government has set out an intention to achieve an overall budget surplus by 2019–20, it has not provided full details of how this would be brought about. Between 2014–15 and 2019–20, the government’s objective to reduce borrowing requires active policy measures that will increase tax revenues and/or cut spending by 5.3% of national income. So far, it has only set out detailed plans for delivering just under half of this. In the absence of explicit measures to increase taxes or reduce social security spending, the remaining cut to borrowing would have to be found from further cuts to public services beyond 2015–16. This would require departmental spending being 14.1% lower in real terms in 2019–20 than it is planned to be in 2015–16. Adding this on to the cuts to departmental spending already planned between 2010–11 and 2015–16 would bring the overall cut to departments’ budgets over the nine years up to 22.2% (which includes a 41.0% cut on average to spending other than on the NHS, schools and official development assistance).

This means that, while each of the three main UK parties could loosen fiscal policy relative to the current government’s ‘plan’, this simply reduces the amount of ‘unspecified’ action they would need to take, rather than giving them room to announce new net giveaways in the run-up to (or after) the general election.

Of the three main parties, the Conservatives have set out the tightest objective for medium-term fiscal policy – they have said they would aim to achieve an overall budget balance by the end of the parliament. If they aimed just to meet their target, they would need a fiscal tightening in the next parliament that was 1.0% of national income smaller than required by the current government’s plan. If they implemented all the tax and social security changes legislated by the current government, and stuck to the departmental spending plans set out for 2015–16 but implemented no other tax or benefit measures, this would imply departmental spending cuts between 2015–16 and 2019–20 of 8.3% in real terms.

Labour and the Liberal Democrats have proposed very similar targets for borrowing, to each other and to the current government’s (recently-revised) fiscal mandate. If they wanted to aim just to achieve their targets (and stick to the current government’s plan to invest 1.2% of national income), Labour and the Liberal Democrats could borrow 2.3% of national income more in 2019–20 than currently planned by the government. Assuming, again, that they implemented all policies currently detailed by the government but no further tax rises or social security spending cuts, Labour and the Liberal Democrats would need to reduce departmental spending by just under 2% in real terms.

The implied cuts to departmental spending could be reduced if the parties chose instead to increase taxes or cut spending on social security. While some politicians have talked about doing one or other of these things, the specific policy proposals that have so far been put forward by each of the three main parties do little to ease the implied pressure on departmental budgets. The set of policies that Labour has explicitly talked about amount (according to its costings) to a roughly revenue-neutral package – that is, giveaways in some areas offset by roughly equal-sized takeaways elsewhere.

Meanwhile, the sets of policies explicitly announced by the Conservatives and the Liberal Democrats actually amount to net giveaways. As we get closer to the election, each of the parties should give the voting public more detail on exactly what its plans are: how and how much spending on social security will be reduced, where and by how much taxes will be raised, and how much further public service spending will be cut.

The spending cuts required by Labour and the Liberal Democrats to achieve their stated borrowing targets would be significantly smaller than those required by the Conservatives. But this would obviously come at the cost of government debt remaining higher for longer. This would have two costs: more public spending would have to be devoted to making interest payments on debt, and the UK would be less well placed to absorb any future large shocks that pushed up public debt, as the financial crisis did in 2008.

The choice between higher spending with higher debt and lower spending with lower debt may be one of the key dividing lines in the election between Labour and the Liberal Democrats on the one hand and the Conservatives on the other. It is therefore incumbent on each of the parties to provide the electorate with more detail of why they are advocating a particular stance, how they will achieve the required borrowing reductions, and what their objectives really mean for the quality and quantity of public services and the ability of the UK’s public finances to deal with future pressures.

Sources: www.ifs.org; (IFS UK pre-election briefing note – December 2015)