The parties’ manifestos cover a lot of ground. But what would their fiscal policies mean for the country? As we set out in an earlier report, boring-sounding rules about the deficit matter hugely for the country’s public debt trajectory, the parties’ delivery of services and tax and benefit policies, and for accommodating coming demographic challenges. And those same rules present the public with some big choices at this election about levels of investment spending.
With the main parties’ manifestos now out, the graph below projects Public Sector Net Borrowing (i.e. total borrowing both for day-to-day spending and capital investment) using information from each party and a few extra assumptions. The parties have presented voters with both quite a lot of detail of their plans and a wide range of choices.
Figure 1: The parties’ plans together with some important assumptions allow us to forecast net borrowing under each party
Source: RF analysis based on OBR figures, party manifestos and further assumptions
The Liberal Democrats
The Liberal Democrat manifesto commits to “[running] a cyclically adjusted current budget [balance] from 2019-20, so that we are no longer borrowing for day-to-day spending”. This is in effect a continuation of the 2010-2015 Coalition target, albeit pushed back further. Given that the structural current deficit is forecast to be (only) 0.9 per cent of GDP in 2017-18 and for there to be a 1.1 per cent of GDP surplus in 2019-20, the goal could be met with some loosening versus existing plans. And indeed, the party proposes a loosening of £14 billion, while still leaving headroom of around £9 billion relative to its goal. After 2019-20, current spending would rise roughly in line with GDP, the party says.
However, the party has also said that it would commit to a “£100 billion package of additional infrastructure investment” – though this would be the amount signed off in the next parliament rather than the amount actually spent, with some infrastructure projects having much longer turn-around times. In 2019-20, the party has said this would mean £5 billion extra investment (a 12 per cent increase on existing plans) and we assume for illustration that this rises to £10 billion by 2021-22 (a 19 per cent increase on existing plans). Together with already-planned increases in investment spending as a share of GDP after 2019-20, this means that overall borrowing would rise after 2019-20 in the Liberal Democrat plan even though the current budget would remain in surplus. Under our assumptions, borrowing would level off at 2.5 per cent of GDP, similar to its current level and just slightly below the average of the five years before the financial crisis but higher than either of the other parties.
The Labour manifesto gives a “target of eliminating the government’s deficit on day-to-day spending within five years”. This is a rolling target – always five years ahead – again reflecting an approach used by the Coalition government. The party’s manifesto costings, however, imply a far tighter deficit trajectory than this rule requires – i.e. the party would have a lot of headroom relative to its target. Labour have proposed £49 billion of additional current spending in 2021-22, but argue that this would be fully offset by £49 billion of additional taxes. Assuming that these tax changes would indeed raise the stated revenue, the result is that the current budget trajectory would not be changed from what the Office for Budget Responsibility (OBR) has forecast. By 2021-22, therefore, the party would be forecast to deliver a current budget surplus of 1.6 per cent of GDP – while its rule would only require a balance of 0 per cent, five years out (2022-23). Rather than further increase this headroom, we assume in the graph above that current spending rises in line with GDP after 2021-22.
A large difference with existing fiscal plans, however, is that the party would “take advantage of near record low interest rates to create a National Transformation Fund that will invest £250 billion over ten years in upgrading our economy”. This is separate to a further £250 billion of private investment it hopes to stimulate through a National Investment Bank (including some public lending which we have not modelled). Increasing net investment by around £25 billion a year (a boost of roughly 50 per cent) increases overall borrowing by around 1 per cent of GDP each year – explaining all of the short-term difference between the Labour and Conservative lines above. Under our assumptions, net borrowing levels off at 1.8 per cent of GDP, lower than at any time since 2001-02 and lower than the Liberal Democrats – despite even higher investment levels – due to a much larger current budget surplus.
It should be noted though that we assume for simplicity that GDP rises equally under each party. Each would of course argue that their fiscal, investment and other policies would be best for growth. Equally we take no account of the fact that more borrowing – whether for capital or day-to-day spending – would mean a larger debt interest bill each year, money that would squeeze out other current spending.
The Conservative manifesto says the party “will continue with the fiscal rules announced by the Chancellor in the autumn statement last year, which will guide us to a balanced budget by the middle of the next decade.” In terms of the official ‘Charter for Budget Responsibility’ this might be taken to mean that a Conservative government would continue with the mandate of reducing cyclically-adjusted public sector net borrowing to below 2 per cent of GDP by 2020-21, and restating its ultimate objective as seeking to return the public finances to balance at the earliest possible date in the next (2022-2027) parliament. But its clear intention to close the budget deficit entirely is an indication that there will be no large deliberate change from the existing outlook which sees the deficit falling to 0.7 per cent of GDP in 2021-22 and that we should expect further consolidation beyond that.
We assume that the party hits budget balance in 2025-26. To give a simple interpretation of what that mean for taxes and spending, Figure 2 assumes that receipts would need to rise by a further 0.35 per cent of GDP and that total spending would fall by the same. Especially with demographic challenges – and as-yet unfunded policies such as income tax cuts, the NICs U-turn and an uncertain social care policy costing – tough choices will need to continue to be made. Indeed, the OBR has said that such a trajectory would imply four more years of per capita departmental spending falling in real terms. In addition, while public investment is set to rise to 2021-22, if that rise were to continue further into the 2020s then that would need to be funded by spending cuts or tax increases elsewhere.
Figure 2: Delivering a balanced budget will inevitably require further consolidation beyond current plans
The Labour and Liberal Democrat plans would mean more borrowing. But they would also mean more public investment. Both parties mention new rail lines, rail electrification, low-carbon energy, superfast broadband, more R&D, more homebuilding and increased capital spending in schools and hospitals. Figure 3 shows the levels of Public Sector Net Investment that might be implied by the parties’ plans. These are necessarily simplifications and presumptions: all we know is that Labour would spend £250 billion over 10 years and that the Liberal Democrats would spend £5 billion more in 2019-20 with the intention of ramping this up further. There are also questions about how much extra spending could actually be realised in the short-term given the degree of planning required for many projects.
Figure 3: Public investment is forecast to rise but Labour and the Liberal Democrats have promised significant additional increases
Even under the Labour proposals, investment as a share of GDP would only return to where it was in 2009-10, though this reflected a dip in GDP as well as higher spending. In fact, a level of 3.4 per cent of GDP would be the joint highest since 1976-77; and even under the Conservative plans net investment would be higher than at any time from 1980 to 2007.
Of course, higher borrowing would mean higher debt. However, all three parties’ plans are consistent with debt falling relative to GDP. Indeed, Labour “are committed to ensuring that the national debt is lower at the end of the next Parliament than it is today” while the Liberal Democrats propose “reducing national debt as a percentage of GDP year-on-year” (with a caveat about recessions).
Assuming parties continued with their fiscal stances indefinitely – and again assuming no differences in economic growth between parties – differences in borrowing can eventually lead to very large differences in national debt (though note that this measure does not include illiquid assets such as publicly owned housing, schools or railway lines which would be captured in a comprehensive measure of public net liabilities). One of the reasons this matters is that, in fact, we should expect future shocks that will increase debt beyond what a smooth trajectory might suggest – as our previous report explored.
Figure 4: In the unlikely event that the parties continued their fiscal policy indefinitely, large differences in the public sector’s net debt would eventually open up
Source: RF analysis based on OBR figures, party manifestos and further assumptions
Back in 2014 and 2015, we warned about a candour deficit about the parties’ deficit plans and their implications. In this election, we actually know quite a lot, with the Conservatives largely continuing government policy and Labour and the Liberal Democrats setting out detailed changes relative to that baseline (with the SNP manifesto still to come). And the sometimes-heard objection that ‘they’re all the same’ is not true here – if it ever was. Recent manifesto launches show that very different policies about borrowing, investment, tax, welfare spending and departmental spending are on offer. Nonetheless, as ever there remains the question: what if the economic forecasts that underlie these fiscal projections prove too optimistic or too pessimistic? We can expect less candour on that question.
While the deficit is lower and perhaps less of a talking point than in the last two general elections, the relatively clear approaches of each party are to be welcomed. After all, the parties’ fiscal and investment stances will determine the next government’s options in a whole range of other policy areas for years to come.