It is no surprise that economic policy is dominating debate during the election campaign. Labour’s message is that it can offer hope on living standards and growth in combination with a credible fiscal strategy. It faces claims that it wants to borrow up to £30bn more than the Conservatives plan to do and that it would raise taxes. It is worth engaging with the debate about these figures and recognising the frame in which this debate is taking place.
The budget revised coalition spending projections for the next parliament. The coalition’s new fiscal target is to be on track to balance the cyclically adjusted current deficit by the third year of a five-year rolling period. Another name for this measure is the structural deficit and it is the amount of borrowing to fund current spending that does not vary with the economic cycle. With the help of some tailored projections for reducing spending (without any detail about specific cuts), the coalition was able to get a thumbs up from the Office for Budget Responsibility.
Coalition plans also mean the whole current deficit is eliminated and there is a current surplus by 2017-18. The coalition projections assume around £30bn of investment spending, which it would fund partly through cuts in current spending and partly through borrowing. This is all hypothetical of course because the coalition will not exist beyond 7 May.
Labour plans to eliminate all borrowing for current spending (current borrowing) within the life of the next parliament. This is potentially a stricter target than the coalition’s but could be more than met under current coalition plans, though no one knows how the coalition would actually achieve this in practice because it has declined to say. If Labour simply balanced the current budget but maintained the level of investment spending planned by the coalition, it would need to borrow to fund all investment spending. That figure would be up to £30bn a year.
It is possible Labour will cut current spending further but it is worth noting that until recently all parties have accepted that it is appropriate to borrow to fund investment. Investment spending raises the productive potential of the economy, which should raise the GDP growth rate, and lead to higher tax revenues in future. Labour’s approach gives it a credible fiscal plan which allows government to promote growth. Moreover, Labour could meet its target without further spending cuts beyond 2015-16, according to the Institute for Fiscal Studies.
Earlier this year this year Labour voted for the coalition’s new fiscal target. This requires the structural deficit to be removed on a three-year rolling basis. The Conservatives claim that, assuming Labour still wants to meet this target and does so by spending cuts and tax rises on a 50/50 basis, there will be a significant cost per household. However, the Institute for Fiscal Studies has pretty well discredited this claim for a number of reasons. The IFS notes that Labour would only have to find another £6bn a year after 2015-16 if it wanted to meet the target. This is very different to the £40bn of cuts that the Conservatives would need to find if they kept to George Osborne’s budget.
The Conservative party states that it plans to eliminate all government borrowing, including for investment, by the end of the parliament. This is projected to happen under the coalition’s plans, but the Conservatives have detailed hardly any of the spending cuts that would be necessary. Conservative strategy relies on people seeing all borrowing as bad, even borrowing to invest, and on raising the scare of tax rises. The Conservative strategy is hypocritical, because George Osborne has been happily borrowing to invest for the past five years. Tory fiscal plans are far from credible since they seem to have little idea where exactly they would cut spending. Indeed, the scale of the potential cuts under the Conservatives should itself raise the risk that a future Conservative government would decide to hike taxes, a much greater risk than is claimed for Labour.
Nevertheless, just over a week into the campaign, the accepted media frame for the debate seems to be that the Conservatives need to spell out where they would cut spending and Labour needs to show where it would raise taxes, as if the two were somehow equivalent. The figures outlined above, from the IFS, show this is not the choice facing the electorate at all. There is still a possibility that we will see another tax cut announcement from the Conservatives during this campaign, requiring more spending cuts. Labour therefore should have confidence in its own figures and targets, and resist the lazy framing of the economic debate we have seen so far.
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