With the Coalition government expected to have delivered around half of its intended fiscal consolidation programme by the end of the current parliament, debates over public finances are set to loom large in the coming election campaign. To date, we have only very broad outlines of the preferred approaches of each of the main parties.
Assessing precisely what is implied by the parties’ differing approaches depends on a number of details around timings and mechanisms which have not yet been specified, and we make no attempt in this note to offer a definitive evaluation. Instead, we present indicative outcomes based on a range of reasonable interpretations of the different rules. In doing so, we make use of the OBR projections for growth, spending and receipts set out alongside Budget 2014. These figures will of course be revised at Autumn Statement 2014 (and again at Budget 2015) – not least because current estimates suggest that the previously projected tax revenues are set to significantly undershoot this year – meaning that all of our analysis will also be altered, reinforcing the need to treat our findings as indicative only.
- The analysis presented in this note is speculative. It is based on our interpretation of highly sketchy plans set out by each of the parties to date. It takes no account of the extent to which a future government will make things harder for itself by introducing new tax cuts or spending increases that will require funding, or of growing pressures for new areas of ringfencing (such as defence spending). Nor does it deal with the fiscal pressures associated with an ageing society, or with the difficulties that might be posed if the recovery continues to be characterised by weak pay growth and therefore weak revenues. There are also likely to be some dynamic, macroeconomic effects associated with different paths of deficit reduction that we have made no attempt to reflect. And of course, all of the underlying numbers will change as economic conditions develop and official forecasts are revised.
- The pre-election debate is likely to centre on questions of credibility and feasibility. Those advocating slower deficit reduction will question how realistic it is to assume that government departments have the capacity to withstand ever-deeper cuts, or that families will be able to cope with further reductions in benefits or indeed increases in tax. In contrast, those favouring a faster pace will argue that their opponents lack credibility and will burden the country with higher levels of debt (and therefore debt interest payments) for longer into the future and leave the economy less equipped to deal with new fiscal shocks and pressures.
- And all parties will seek to suggest that they are prioritising future growth by at least ringfencing capital spending – whether that be in the form of excluding some (Liberal Democrats) or all (Labour) investment expenditure from their deficit targets, or via a formal target for investment as a share of GDP (Conservatives and Liberal Democrats).
- Less than six months out from the general election no party has provided anything more than highly sketchy fiscal plans, which makes any overall judgements difficult. What is clear, however, is that all of the parties face an incredibly difficult dual challenge: establishing a clear and credible trajectory towards deficit reduction on the one hand; while detailing a path of spending cuts or tax-rises that is likely to be politically achievable on the other. The next government is going to have to walk an unusually precarious fiscal tightrope.