Public finances, austerity and the recovery This is the first of a short series of blog articles looking at what we know about the direction of tax policy following this year’s political party conference season. These are based on the extended version of an article by CIOT External Relations Manager George Crozier that appears in this month’s edition of Tax Adviser. The CIOT is strictly politically neutral and nothing in this article should be interpreted as endorsement for or opposition to any of the policies mentioned.
The battle lines are being drawn.
Unlike in previous Parliaments, politicians have the luxury of knowing when the next general election will take place – barring government collapse in the meantime it will be on May 7th 2015. Yet while that may be more than 550 days away, the ground on which the election will be fought is being staked out now, as the parties battle to set the context, frame the questions and lay down the markers on which voters will be invited to decide. As ever, tax and the public finances in general are at the centre of this.
The public finances: Desperately seeking surplus
At the Conservative conference in Manchester Chancellor George Osborne announced two new principles for the public finances under a Conservative Government. Firstly, he would aim to achieve an absolute surplus by the end of the next Parliament, provided the recovery is sustained. Second, he would ensure that capital spending grows at least in line with GDP. He said both of these principles could be delivered without raising taxes: “while no responsible Chancellor ever rules out tax changes, I think it can be done by reducing spending and capping welfare, not by raising taxes. That’s my plan.” Only if the Government properly control public expenditure will they “be able to keep lowering taxes for hardworking people in a way that lasts”. The verdict of most commentators was that the Chancellor’s speech was the most important one made during the conference. One described it as “an economic prospectus of striking political clarity”.
While there is no reason to think the Chancellor does not believe in the economic strategy he has set out in its own terms it does also offer tactical opportunities. By promising to run a budget surplus by 2020 he sets a challenge for Shadow Chancellor Ed Balls to meet. If Balls refuses to match this commitment the Chancellor will no doubt say that is proof of Labour irresponsibility, a message he is keen to communicate and contrast with Conservative responsibility.
At Liberal Democrat conference in Glasgow party leader Nick Clegg opened up a dividing line with the Conservatives by saying tax rises will be needed after the election to bring the deficit down. While George Osborne has said that the final two years of deficit cuts up to 2017-18 can be secured by spending cuts alone (or possibly by higher than forecast revenues) Clegg said he was "completely against" this. In a Q&A session he said: "We will go into the next election in favour of more fair taxes and not follow George Osborne's plan, since it makes further savings only out of spending cuts. Of course we are not going to do that. That's not Liberal Democrat. It won't happen under my watch." Danny Alexander had earlier warned that the next Parliament would be “another five years shaped by the necessity of fiscal restraint”. At the CIOT/IFS fringe meeting Lib Dem peer and Government Treasury Spokesman in the House of Lords, Dick Newby, said that, to the extent that further fiscal consolidation was needed in the next Parliament, he expected it to be broadly 20% tax increases and 80% cuts in expenditure.
Labour’s macroeconomic strategy is less clear. In Brighton the party pledged to get the deficit down in a fairer way than the Coalition, “to balance the current budget and get the national debt on a downward path”. They have promised ‘iron discipline on spending’ with a zero-based review of every pound spent in Government to identify savings “so that we can switch resources to Labour’s priorities.” But they have not said how fast they would reduce the deficit nor how much of the work would be done by tax rises as against spending cuts. Shadow Chancellor Ed Balls has committed that the Coalition Government’s day to day spending totals for 2015/16 will be the starting point, with any changes to current spending plans for that year fully funded and set out in advance in Labour’s manifesto. There will be no more borrowing for day to day spending in 2015-16 but Balls has left open borrowing for capital investment. Some commentators anticipate a Shadow Budget in March 2015.
A footnote on this topic: At the CIOT/IFS fringe meeting in Brighton, Paul Johnson of the IFS said that, while the past was not necessarily a guide to the future, on average over the last 30 years each Budget has raised taxes by about £1 billion. Each post-election Budget has raised taxes by an average of about £7 billion. Most of these increases had not been trailed during the election campaign.
The right kind of recovery?
What a difference a year makes! The job of balancing the budget may still have a long way to go but the debate about the deficit has already turned into a critique of the recovery. Are we getting the right kind of growth? How shall we spend the proceeds of growth? And most heatedly of all, are ordinary people feeling better off, or is it just a recovery for the few?
The change in focus was most obvious at Labour conference. In Manchester 12 months ago Labour was advocating a temporary cut in VAT as the centrepiece of an economic stimulus package to ‘kick start the economy’. A year on the VAT cut is dropped (in cash terms, the biggest policy change of the week, cutting £13 billion from the party’s spending plans) and the focus has changed entirely. As recovery has begun the balance has moved from immediate stimulus to a combination of capital investment and measures designed to help households who are suffering from wages that are not keeping up with the cost of living (see below). Labour’s main economic message is no longer that the Government are choking off the recovery, rather that whatever the GDP figures might say, ordinary families are not getting better off. If anyone is getting better off, it is only the wealthy few, is the message, or as Labour leader Ed Miliband succinctly put it: “They used to say a rising tide lifts all boats, now the rising tide just seems to lift the yachts.” The policies adopted at this conference were designed to send the message that Labour is the friend of ordinary hardworking families, the Conservatives only of the privileged few.
The need to generate sustainable growth was once again a prominent theme at all three party conferences this year, and the subject of numerous fringe meetings. At the Lib Dems, Nick Clegg and Vince Cable both used their conference speeches to take credit for the Government’s initiatives in this area, such as the £2,000 Employment Allowance (NI cut) and the Business Bank, which aims to mobilise private capital to support new banks, local banks and non bank finance. The Lib Dems’ big summer and autumn campaign – the ‘Million Jobs’ campaign – taps into this, highlighting how ‘Lib Dems in Government have helped businesses create over 1 million private sector jobs’ with measures such as the Employment Allowance and the Regional Growth Fund, and vowing to help create a million more.
The cost of living – or the fundamentals?
As mentioned above, Ed Miliband put the ‘cost of living crisis’ and Labour’s determination to help struggling households at the centre of his conference speech. The pledge of an immediate freeze to gas and electricity bills for two years for all Britain's homes and businesses was the policy announcement which got the most attention, but more help for childcare, support for an increase to the minimum wage, promotion of the ‘living wage’ and a commitment to a 10p starting rate of tax were also designed to support this message. Some dubbed it ‘consumer socialism’.
The Conservative response is to try to keep the debate on economic fundamentals. There are two strands to this. First, persuading people that, while a corner is being turned, “this battle to turn Britain around - it is not even close to being over [and the Conservatives should be allowed] to finish what we have started” (George Osborne). And second, to persuade people that the key to improving living standards is not ‘gimmicks’ like the energy proposal, but underlying sound economic policy which will keep interest rates low and encourage business to create jobs: “People know the difference between a quick fix con and a credible economic argument… The bedrock of any sustained recovery and improved living standards is economic stability” (Osborne again). This battle to frame the economic debate is heavily influenced by polling which shows that while voters believe Labour are more likely to tackle the cost of living crisis, they think the Tories are more likely to deliver economic growth. These messages (‘serious economic plan’, ‘economic responsibility’, ‘let us finish the job’) will continue to be pushed by the Conservatives between now and the election.
The Conservatives recognise the need to respond directly on the cost of living though. Real terms cuts in council tax and fuel duty, and the increase in the income tax personal allowance were emphasised here as they were by the Lib Dems in Glasgow. ‘Help to Buy’ is a key part of the Conservative message in this area, but the party is also planning to announce a series of measures such as cuts to the price of rail commuters’ season tickets and a curb on bank fees and water bills. A senior government source told The Times that the measures would be introduced in the run-up to the Autumn Statement.
The Lib Dems’ main contribution to the cost of living agenda is obviously the increase in the income tax personal allowance. But a number of other ideas are floating around too. Vince Cable revealed that he has asked the Low Pay Commission “to advise how we might achieve a higher minimum wage without damaging employment”. Cable told The Guardian that employers could be compensated for paying the higher wage with a cut in National Insurance, which "would be a far better option for tax cuts than the Tories' marriage tax allowance". Party President Tim Farron vowed: “It is time that we made the minimum wage a living wage.” The party is also increasingly claiming a share of the credit for the Government’s real terms cuts in fuel duty and council tax, as well as the pension ‘triple lock’ which did appear in the Lib Dem manifesto.
The cost of living was also at the centre of a policy paper called A Balanced Working Life, containing policies for low and middle income households. Among the proposals in the paper – which was passed – are support for a ‘living wage’, which central government would guarantee to pay, flexible working and an increased allocation of free childcare. The paper also proposes a review of Universal Credit two years after its introduction with a view to possibly increasing work incentives or introducing a disregard for families with disabled children and a disregard for second earners.
The central Lib Dem message is summed up by the party’s maxim that while Labour cannot be trusted with the economy the Conservatives on their own cannot be trusted to deliver fairness (hence the conference slogan: Stronger Economy. Fairer Society).
On policy going forward there are three big dividing lines on public finances, austerity and the recovery. In simplified form they are:
Eliminating the deficit: Tax rises needed (Lib Dems and, probably, Labour*) versus no tax rises needed (Conservatives)
Cost of living (1): microeconomic measures (Labour) versus focus on the ‘economic fundamentals’ (Conservatives)
Cost of living (2): cutting bills (Labour) versus cutting taxes (Conservatives and Lib Dems)
* Labour have not yet said explicitly, but they have already announced a number of planned tax increases which they have said will appear in their manifesto.
CIOT External Relations Manager
Friday 1 November 2013