by FERDINANDO GIUGLIANO/ pic by BLOOMBERG
FOR much of the past three and a half years, Britain’s main political parties have struggled to express a clear plan for how the UK should leave the European Union. A new report shows they’re just as clueless about managing the public finances.
The Resolution Foundation think tank has looked at how the size and shape of the British state would change if the Conservatives or Labour were to win December’s general election.
The two parties are yet to present their manifestos, but they’ve both made significant policy announcements over the past few years that give a sense of where they’re headed — and there may be more details on their borrowing plans laid out yesterday.
The most eye-catching finding of the report is just how much both the Tories and Labour would hike public spending, reversing a decade of Conservative-led austerity.
Regrettably, neither has explained how they mean to pay for their generosity and the inevitable demands of an ageing society.
The UK state spending has fallen from a peak of 46.6% of GDP in the early 2010s to just above 40% under current plans, but this trend is set to reverse, whoever wins in December.
Chancellor of the Exchequer Sajid Javid has emphasised the need for much more spending on infrastructure. According to the Resolution Foundation, the spending plans announced so far by the Conservatives would lift total managed expenditure in the UK to 41.3% of GDP by 2023-24.
Meanwhile, the Labour Party included in its last election manifesto in 2017 pledges totalling £48.6 billion (RM256.9 billion) of extra day-to-day spending and £25 billion of extra infrastructure spending.
The report calculates that this would increase state expenditure to 43.3% of GDP, well above the 70s average. In fact, this might be a prudent estimate. According to the Financial Times, shadow chancellor John McDonnell is planning to announce that Labour would more than double its borrowing commitments for extra capital spending to £55 billion a year.
UK outlays as a share of GDP are below the Organisation for Economic Co-operation and Development average. France, Italy and other countries have much bigger states. In any case, the size of Leviathan is a central question for public policy. It’s entirely legitimate that political parties want a larger role for the public sector.
There are, however, two unresolved issues that Labour and the Tories should be much more transparent about. The first is how they’ll fund their promises and what fiscal rule (if any) they’d follow to make sure public finances are kept in good order.
On top of Javid’s spending plans, the Conservatives have made wild promises of tax cuts.
Prime Minister Boris Johnson (picture; right) said he wants to raise the threshold on when people start paying the higher level of income tax from £50,000 to £80,000.
At least Labour is more open about the need to raise taxes (or soak the rich) to pay for its largess.
Yet, it needs to explain what fiscal rules it intends to follow, especially concerning the national debt. The existing rule says net public debt as a percentage of GDP should fall by 2020-21, but it will be very hard for either party to respect that ambition.
The second problem concerns how spending is targeted and its impact across generations. The think tank finds that austerity has hit different parts of government in very different ways. Like much of Europe, the UK’s ageing population means spending on healthcare and pensions is destined to keep increasing. The political parties must explain whether they intend to pay for this through higher taxes or more borrowing — or whether they’ll limit its expansion.
For now, Labour and the Tories are a long way from providing clear answers. The Conservatives’ bruising experience over the so-called “dementia tax” in their last manifesto will encourage everyone to tread carefully. But voters need both parties to come clean about how they’ll tackle the demographic time bomb. — Bloomberg
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.