Do the parties’ sums add up?

Labour’s tax and public spending plans

Labour’s tax and public spending plans for the three years 2001/02, 2002/03 and 2003/04 are set out in detail in the March 2001 Budget Red Book (2001 RB). 2003/04 will represent the third year of the next Parliament; on the basis that no detailed plans are set out in the 2001 RB for any subsequent periods, this article will concentrate on the tax and public spending plans for the next three years 2001/02 to 2003/04.

Labour’s public spending plans are ambitious:

  • Public spending is set to rise from Pounds 368bn in the financial year just ended (2000/01) to Pounds 442bn in 2003/04 (41% of GDP), an average annual real increase of 3.8% as compared to the average annual real increase in public spending during Labour’s first term of 1.4%.
  • Health and Education will each receive average annual real increases of around 5.5%, whilst the Police will receive an average annual real increase of around 7%. By 2003/04 these three areas of spending will represent around 30% of total public spending.

The 2001 RB projections assume no further tax changes other than the annual uprating of flat rate duties, tax thresholds, tax allowances etc in line with inflation; in fact the tax burden as a proportion of GDP is set to fall slightly.

So how can these increases be afforded?

Bearing in mind that the 2001 RB projections assume that the economy grows by only 2.25% p.a. The answer is that Labour’s plans represent the ‘cashing in’ of the huge budget cash surplus (as arrived at before accounting for the Pounds 22bn Treasury windfall from the sale of Telecom licences) of Pounds 16bn in 2000/01; this will have turned into a deficit of Pounds 10bn by 2003/04.

However, bearing in mind that 2003/04 will see net public investment of Pounds 19bn, Labour would still be meeting its ‘golden rule’ of only borrowing for NPI, whilst the net public sector debt (NPSD)/GDP ratio (i.e. aggregate Government debt as a proportion of national income) is projected to be only 30% by March 2004 (well within the 40% limit imposed by the Treasury via its ‘sustainable debt rule’, and well down on the 44% ratio inherited by Labour in 1997).

My conclusion is that Labour’s plans out to 2003/04 are achievable without unreasonable public borrowing and without the necessity to increase taxes – as long, of course, as the economy performs as forecast.

If, however, the economy only grew by (say) 1.25% on average over the next three years, instead of the 2.25% used for the purposes of Labour’s plans, then on the basis that the public spending plans were still implemented in full I calculate that the Government would need to borrow approaching an irresponsible Pounds 30bn in 2003/04.

Mind you, if the economy does not perform as well as the Treasury assumes, this would hit the tax and public spending plans of the other parties as well.

Conservatives’ tax and public spending plans

Essentially, and perhaps to the chagrin of their more right-wing supporters, the Conservatives’ tax and public spending plans are remarkably similar to Labours. The only difference is that the Conservatives would increase spending by 3.1% per annum in real terms on average over the next three years, still over double the rate at which public spending increased in Labour’s first term, and would aim to spend Pounds 434bn in 2003/04 rather than Pounds 442bn.

The Pounds 8bn per annum thus saved would be spent on tax cuts, including 6p per litre off petrol together with the exemption of savings income received by basic rate taxpayers from income tax.

So where would the Pounds 8bn ‘cuts’, as compared to Labour’s plans, fall?

Here, it must be said that the Conservatives’ figures lack credibility. Of the Pounds 8bn ‘cuts’, Pounds 2.5bn would come from Social Security and Pounds 1.8bn would come from reducing the size of Government. Some 18m households currently claim some form of Social Security benefit, so the Pounds 2.5bn ‘cut’ in Social Security budget represents around Pounds 150 per annum from each of these households on average. The Conservatives have not explained which of those 18m households would be affected, nor by how much on average.

The proposed Pounds 1.8bn cuts in the cost of Government have not been satisfactorily explained, either.

To conclude on the Conservatives’ plans, they propose almost as much of a massive public spending hike as Labour. It probably is possible to cut Pounds 8bn off Labour’s proposed Pounds 442bn speaking without effecting the ‘favoured’ areas of Health, Education and Police (which between them are set to account for only about 30% of public spending anyway), but the Conservatives have not yet explained how in any credible form.

Liberal Democrats’ Tax and Public Spending Plans

The Liberal Democrats also use Labour’s plans as a starting point, but by contrast to the Conservatives’ proposed decrease in tax and spending by 2003/04 as compared to Labour’s plans, the Liberal Democrats propose higher taxes and spending than Labour.

They would raise the basic rate of income tax by 1p, yielding Pounds 3.2bn, impose an income tax rate of 50% on the income band of over Pounds 100,000, yielding Pounds 4bn, and would make certain changes to Capital Gains Tax (CGT) (including the abolition of the CGT exemption on death) to yield around Pounds 1.6bn; all these annual yield figures in their manifesto are sourced to Treasury answers/House of Commons Library calculations.

This would give them around Pounds 9bn per annum extra spending power by 2003/4, which they would spend on pensions (Pounds 3bn) Education (ditto) and Health (Pounds 2bn) with the other Pounds 1bn or so going principally to Transport and the Police. For pensions this would provide Pounds 5 per week for each single pensioner, Pounds 10 for the over 75’s and Pounds 15 for the over 80’s.

On Health it would provide (interalia) free personal care for the elderly; whilst on Education it would provide for the abolition of higher education fees and a reduction in class sizes. All the costings have again been supported by independent calculations.

My conclusion on the Liberal Democrats is that their figures appear realistic.

Overall conclusion

Contrary to popular belief, and subject to the cave at that all the figures rely on the economy growing at the rate of 2.25% per annum, my overall conclusion is that the tax and public spending figures put forward by the three main political parties (at least out to 2003/04) are as true and fair as one might reasonably expect in the murky world of politics.

In his role as Head of Economics at City accountants Chantrey Vellacott DFK, Maurice Fitzpatrick speaks regularly to all of the main three political parties.

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