The Labour Party manifesto came out today and helpfully they have produced a “Grey Book”, which sets out the financial framework for an incoming Labour Government.
The financial framework is typical of Labour under Corbyn; lots of sensible, well thought out, pragmatic policies, mixed in with bat shit crazy stuff, and middle class fiscal fads.
The overall of fiscal framework (the balance of tax and spending) is broadly conservative; Labour plan to run a small surplus on day to day spending by the end of a 5 year Parliament. They are excluding capital spending from this rule, and instead are assessing capital spending against a separate set of rules measuring Public Sector Net Worth . This framework was developed by the Resolution Foundation, chaired by former Tory MP David Willets. These are Labours fiscal credibility rules:
So far all good stuff.
Within this commitment to financial balance Labour are planning an extra £82.9bn of extra spending, and £83bn of extra taxes, leaving a surplus of £0.1bn.
This will increase Government spending by 4% of GDP to roughly the same level of James Callaghan after the IMF intervention; lower than Blair, Brown, Attlee or Wilson, but higher than any Tory Government.
This might come as a surprise to anyone who heard Laura Kuenssberg (and many other commentators) describe Labours proposals as the highest levels of spending of any post war Government.
That is because she, and lots of other journalists, are counting the capital and revenue proposals together (bad journalism).
Over and above the extra £82.9bn of revenue spending Labor are planning an extra £55bn of capital spending a year. This is to be financed by borrowing, not by taxes.
This means that total borrowing will rise under Labour , however this isn’t necessarily a bad thing. The UK needs lots of investment in infrastructure and while interest rates are low now is a great time to do it. Intelligent spending on infrastructure grows the economy, which reduces the value of debt as a percentage of GDP.
There is a complication with Labour’s capital plans; it is unclear how much of the capital borrowing will fund new infrastructure and how much will be used to transfer existing infrastructure into public ownership. There is a lot of controversy about costing Labours nationalisation plans, but it is clear that this will take up a big chunk of extra borrowing, maybe as much as half. The GDP growth from nationalising existing infrastructure isn’t going to be anything like as significant as from creating new infrastructure.
It’s not a bad plan overall, but it does have some significant problems:
- The framework assumes that they can balance the books at the end of 5 years with £82.9bn of spending and £83bn of tax increases. The problem is that the current budget they inherit from the Tories isn’t balanced – there is a shortfall of £20bn. If they are to achieve balance they need that much less spending or more taxes. This is a massive difference – about 25% of Labour’s plans.
- They are assuming that Brexit is cost neutral. This is totally unrealistic, even in the best case scenario there is a hit to Government finances of £20bn-£30bn. This is a massive problem, particularly because Labour are banking on lots of money coming from Corporation Tax; if companies leave the UK to avoid Brexit the hole could be massive
- The assumption is that the £83bn comes from only the top 5% of incomes, and companies. This is nonsense. If we all want better services, we all need to pay more taxes. The tax base Labour are proposing is too narrow to be sustainable. Lots of the proposals will hit people who aren’t top 5% earners in other ways, through pensions and investments.
- NHS funding isn’t as generous as Labour are claiming. Labour are offering only a slightly more generous funding settlement for the NHS as the outgoing Tory Government. Personally I would have liked a commitment to a Blair style NHS rescue package.
- Labour have also failed to understand that pensions/earnings crisis in the NHS. Badly planned changes by George Osborne have meant that Senior Doctors who take on extra NHS work face very large in year tax bills. This is the main driver behind rising waiting lists and times, not spending. Labour’s plans look set for a big confrontation with senior Doctors very early in a potential Corbyn Government. An existential confrontation.
- The £8.4bn extra on welfare doesn’t make up for the last 9 years of Tory cuts. The extent of Tory cuts is hot debated but I would put it between £12bn and £16bn. Making this good should have been the first priority of a Labour Government
- The commitment to free tuition fees is a terrible policy. While it would benefit my family it is a straight forward transfer of wealth to middle class families. Keeping Tory cuts to benefits while handing out cash to middle class families is a regressive policy, at odds with Labour’s progressive intentions
- Labour want to clamp down on banks and the finance sector, penalise high salaries and make banks pay more tax. All good stuff. But they also want to borrow shit loads of cash off those same banks and financial institutions. There is no real acknowledgement of the tensions this might cause