Today has a clear first for the United Kingdom, the leaders of the three main political parties in the UK (Labour, Conservative and Liberal Democrat) are going to take part in a televised debate on ITV at 8:30pm tonight. There is some concern that the rules (76) are likely to take spontaneity away from the debate and restrict it. However it is an innovation and in the mess UK politics are currently in mostly due to the political expenses scandal I feel that innovations are worth trying. My aim in this analysis is to take an objective look at the economics behind the manifestos which have now been published by all three main parties. I intend to avoid the politics completely and remain impartial. I am grateful to the Institute of Fiscal Studies and the Financial Times for some of the numbers used.
The “elephant in the room”
Yesterday Vince Cable the prospective Chancellor for the Liberal Democrats used this evocative phrase to describe the question of the UK fiscal deficit and of course this also has an implied view for the National Debt. However this is an area where all three main political parties have similar flaws in their plans. If you look at the three published manifestoes there is a hole in each of them of a similar size, £30 billion. So in truth none of them are being transparent and honest in their spending pledges. So the answer to the question what are they not telling us? Is in economic terms £30 billion. This is just over 2% of our Gross Domestic Product (GDP). Put another way it is around a quarter of the annual cost of the National Health Service.
Just to put the size of this “black hole” into further perspective none of the three main political parties have specified credible plans to cut spending by more than £10 billion. So there is quite a difference of scale here. Our political class are misrepresenting the facts and are attempting to mislead voters. This will not help you tonight in choosing but please be aware they are all dissembling. What they do after the election will not match the promises they are making now.
Taking this analysis of tax and spending pledges forward leaves one with a problem as according to the Institute of Fiscal Studies as increases in debt interest payments and rising social security bills are likely to leave us with £37 billion of actual real cuts required by 2013/14 to hit the deficit targets already set by the current government. So it is clear that so far in the debate we are simply not being told the truth. Reality will be much tougher than the promises imply.
I would like to be there tonight to ask the following question, “why do you all have a £30 billion hole in your plans?” followed by “what are you going to do about it?”. It might at least lead to a proper debate on the economics rather than the falsehoods currently inherent in the parties manifestos. It is of course true that politicians have made promises before and not kept them and the debate before the 1992 election was particularly poor in this respect. However with politics and politicians currently being at a low ebb in terms of reputation and public interest this is a bad time for it.
I would like to repeat my request for future ballot papers to have the option of voting “none of the above”. It is a particular shame that a man with a decent reputation Vince Cable has made a claim for honesty and transparency and then produced a set of figures which are no better than the others.
So the true “elephant in the room” is that none of our main political parties are telling the truth about what will happen post-election.
One curiosity is that all of our three main political parties are committed to increasing overseas aid by £4 billion a year by 2013. One might think that someone would question whether in our current financial situation we can afford it, for example is it more important than schools or the NHS? As far as I can tell this appears to be the most sacred of the sacred cows.
We can look at what Labour has done in its 13 years in power. For example it had a policy from around 2002 of increasing spending substantially on health and education which sadly is one of the drivers of our current and future problems. It has raised taxes since 1997 (around £31 billion per annum) but it raised public spending at a faster rate even before the current financial crisis and is now around 48% of GDP. The Institute of Fiscal studies has estimated that in its view there have been substantial rises in public output but that there have also been falls in efficiency of £42.5 billion over the period of Labour’s tenure. To its credit it immediately identifies that these are difficult numbers to quantify and that perhaps some improvements cannot be measured. Labour’s record on keeping its manifesto promises has been sullied by promising not to raise the higher rate of income tax and then doing so.
Labour’s manifesto has in it plenty of things it would like to do but has no new detailed plans to address the deficit. Looking at its track record becoming a party of fiscal rectitude will represent quite a change of philosophy.
Here again we got little detail on exactly how the deficit is going to be reduced beyond a rather woolly “”to eliminate the bulk of the structural deficit over the Parliament”. The current government would also argue it has plans for most of that. They do have a committment to reduce the structural budget deficit which implies that they would cut faster than Labour over the next five years and in essence achieve Labour’s objective a year earlier. They also say that they would split reductions in the deficit using a formula of 80% spending cuts and 20% tax rises. Just as a historical note the formula that Kenneth Clarke applied fairly successfully in the early 1990s was more 50/50.
So we have a promise to cut the deficit more quickly than Labour but like Labour very little detail on how it will happen. One factor which does come into play has been a planned reversal of some of Labour’s planned national insurance tax rise for next year. Politically this appears to have been a success calling it a “tax on jobs”, however this will cost around £6 billion per year which begs the question of how this can happen and the deficit can also fall more quickly than under Labour’s plans.
The manifesto for the Liberal Democrats does contain more detail than for the other two parties and it does contain some extra tax raising of around £2.5 billion a year. Sadly then things become much vaguer as it implies that it will reduce the deficit slightly more slowly than Labour an implication which I believe has already been modified by the party to “at least as much as”,which of course is about as clear as mud. What does appear to be clear is that on announced plans it is this party that will have the highest amount of net tax rises and therefore likely to have the lowest amount of public spending cuts.
Philosophically I have to confess I warmed initially to the idea of raising the personal allowance ( the income level at which income tax starts) to £10,000 as I am keen on measures to reduce the poverty trap of high marginal tax rates on our poorest citizens. However even with a cap at an income level of £100,000 per annum many other people who do not suffer from such high marginal tax rates will also benefit from this so the plan is very inefficient in this respect. Then when I looked at the taxes that were needed to pay for it there are simply too many particularly as in addition to them £4.6 billion is supposed to be raised by anti-avoidance and anti-evasion measures. So perhaps the best proposal ends up being funded by one of the worst examples of wishful thinking!
None of the parties are telling the full truth and in power the policies of all of them will not be the ones they proclaim tonight at least in terms of the economics. In a democracy political parties have considerable freedom in the policies they choose but the current level of dissembling I feel gives our political system a bad name.
I am reminded of the elections in Greece last autumn. They took place with her economic statistics being misrepresented by around 4% of GDP as the previous government had manipulated them, our politicians are sticking their heads in the sand over 2% of GDP.If this means that we will get half of the problems Greece is currently facing over the next six months or so it is a worrying prospect. My article of yesterday highlighted some differences in our respective situations but in this instance we are in danger of a parallel. This is added to by the further difficulties in the Greek bond market today.