Newspaper Articles

Labour’s manifesto spending plans are impossible to cost

Date: 12 May 2017
Authors:
Publisher: The Times

Do the Labour Party’s numbers add up? If I had a penny for every time I’ve been asked that in the past 24 hours, that alone might have given me enough cash to be among the 5 per cent of people they say will be asked for more income tax.

The short answer is, as of yet, I don’t know. The longer answer is to ask whether the question even makes sense in the context of a set of proposals that would represent such a big change from where we are now.

What do we know? Well Labour has said it wants to spend an extra £25 billion a year on investment and infrastructure projects. It has also said it is happy to borrow to invest. Given that we already have about £50 billion a year of capital spending, its own rule would let it borrow £75 billion a year. That’s more than the amount borrowed last year, and much more than levels planned over the next few years. So the period of austerity that began in 2010 would certainly end.

That’s a lot of borrowing though, particularly when debt is approaching 90 per cent of national income. Labour has also committed itself to reducing debt as a fraction of national income over the coming parliament. Whether that is compatible with all its pledges, including nationalising large parts of the electricity and railway industries, is hard to say.

The state would take up a larger fraction of national income. On top of infrastructure plans, higher spending is promised for public services. To the £25 billion on infrastructure we can add £10 billion to get rid of tuition fees, £8 billion for schools and further education, £6 billion for the NHS (a fairly modest commitment), £1 billion upfront for social care and much more besides. Labour would also, presumably, need rather a lot to pay for the promised nationalisations. The National Grid alone has a market capitalisation approaching £40 billion.

The manifesto promises a state not just bigger than that promised by the Conservatives, but one bigger than we have known for 35 years.

That would not just be financed by more borrowing, more tax is promised too, though the leaked manifesto provides little detail. The corporation tax rises would be among the two or three single biggest tax rises in at least 40 years. More would also be taken from the top 5 per cent — those with an income of more than £80,000 a year. Other smaller tax rises have been announced though increases are ruled out for VAT, personal national insurance contributions, and income tax on those with an income below £80,000.

The manifesto suggests new ways in which the state would intervene in the economy. A higher minimum wage is proposed, one high enough to set the pay for more than a quarter of private sector workers and half of young workers. This is one of a list of 20 changes to employment legislation that would greatly change the labour market. It includes banning zero hours contracts, doubling paid paternity leave and “rolling out sectoral collective bargaining”.

None of that would count in a traditional manifesto “costing”, but put all this together and you get a fundamentally different economy. Yes tax, spending and the deficit would all be higher. But the transformation in the role of the state, in regulation, and in the working of the labour market would likely have an even bigger impact. This manifesto cannot be summed up in mere numbers.

Paul Johnson is director of the Institute for Fiscal Studies – follow him @PJTheEconomist

This article was first published by The Times and is reproduced here in full with permission.