Would Labour increase taxes by over £3,000 for every working household?

Date: 30 March 2015
Publisher: Institute for Fiscal Studies

The Conservative Party have claimed that under Labour there would be a £3,028 tax rise for every working household. This calculation assumes that Labour would increase taxes on working households by £7.5 billion in 2016–17 and £15 billion from 2017–18 onwards, with the £3,028 being the average tax rise cumulated over all years through to 2019–20.

What time period, which households?

The first point to note is that, on the basis of these figures, you get to an average £3,000 tax increase by (1) cumulating increases over four years – this is the average additional bill in total over four years, it is not an annual additional cost – and (2) dividing the total tax increase only by the number of working households not by the total number of households.

In a world in which taxes were to rise by £15 billion one would usually describe this as leaving households worse off by £560 a year – £15 billion divided by 26.7 million households.

Cumulating numbers like this over several years is, at best, unhelpful. Ignoring the existence of non-working households doesn’t help provide sensible averages either.

Which fiscal targets?

A more fundamental question to ask, though, is whether Labour would need to impose a tax rise amounting to £7.5 billion in 2016–17 and £15 billion from 2017–18 onwards to meet its commitments for reducing the deficit, assuming that the consolidation is split 50/50 between further tax rises and real spending cuts.

The Conservatives argue that this would be needed for Labour to comply with the Charter for Fiscal Responsibility which it voted for earlier this year in the House of Commons.

The Charter sets out two fiscal targets. First, that public sector net debt should be lower as a share of national income in 2016–17 than 2015–16. Second, that there should be a surplus on the structural current budget balance in the third year of the forecast horizon. This second rule means that, after adjusting for the estimated impact of the ups-and-downs of the economic cycle, total revenues should be sufficient to cover all of the government’s current spending: in other words any borrowing should be explained either by temporary weakness in the economy or spending on investment.

Let’s start with the more important, and sensible, of these targets, the target for structural current budget balance.

The latest forecasts for the structural overall deficit and the structural current budget deficit are shown in the figure below. The OBR’s forecast is that total public spending, less spending on debt interest, would be cut by £30.5 billion by 2017–18 and that this would be sufficient to deliver a current budget surplus of £16.3 billion. However, because some items of public spending – such as spending on public service pensions – is expected to rise the size of the discretionary cut to spending required to bring about this surplus is actually closer to £35 billion.

So on the face of it Labour might need a fiscal tightening of just over £18 billion by 2017–18 (the £35 billion implied by the Budget less the £16.3 billion of overachievement against the fiscal target that Labour would not actually need). Obviously, such a tightening – if half is to come from tax rises – would imply a net tax rise of around £9 billion in 2017–18 (and not the £15 billion the Conservatives suggest).

However, the target set out in the Charter for Fiscal Responsibility relates to the third year of the forecast horizon. While this is currently 2017–18, by the time of any post-election “emergency” Budget this would relate to 2018–19 (because the current financial year would be 2015–16 not 2014–15).

In that year, the Budget forecast is for a surplus on the structural current budget of £33.7 billion, brought about by a total real cut to departmental spending between 2015–16 and 2018–19 of almost £40 billion. In other words the total amount of consolidation needed beyond the cuts in 2015–16 (that Labour has signed up to) would be just £6 billion. Achieving this 50/50 through tax rises and spending cuts would imply a £3 billion tax rise from 2018–19 onwards (and not the £15 billion from 2017–18 onwards that the Conservative numbers suggest).

Latest OBR forecasts for structural borrowing


Debt target

The OBR’s latest forecasts suggest that public sector net debt will fall from 80.2% of national income in 2015–16 to 79.8% of national income in 2016–17. This assumes that there are no new net tax rises or welfare cuts but that departmental spending is cut in real terms by £18.8 billion in 2016–17. This takeaway could be reduced to just over £9 billion and debt would still be forecast to fall slightly as a share of national income. If done 50/50 through tax rises and spending cuts this would imply a £5 billion tax rise in 2016–17 (not the £7.5 billion the Conservatives suggest).

But as we have argued before this target for debt to be falling in a particular year has little to commend it.

In conclusion

It is also not entirely clear – at least to us – when Labour would want to achieve current budget balance. Their oft-stated goal is to eliminate the current budget deficit by, at the latest, the end of the parliament. If that’s all they want to achieve they may need no tax increases or real terms spending cuts – beyond those planned for 2015–16 – at all. But that is later than implied by their having signed up to the Charter for Budget Responsibility. If they take that commitment seriously then they at least need to aim to get to current budget balance by 2018–19. If that’s what they want then they will require about £6 billion of spending cuts or tax increases.

There is real uncertainty about what path the Labour party want to follow for the public finances. The Conservatives have been clearer about what they want to achieve, but they have not been clear about how they would achieve it. They would require substantially bigger spending cuts or tax increases than Labour.

There is little value in bandying around numbers which suggest either party would increases taxes by an average of £3,000 for each working household. We don’t know what they will do after the election. But neither of the two main parties has said anything to suggest that is what they are planning.