The Economist explains

The British parties’ spending plans

By H.C.

BRITAIN’S election campaign is in full swing, with fiscal policy front and centre. The Conservative-Liberal Democrat coalition implemented five years of swingeing cuts to public spending and halved Britain’s deficit as a percentage of GDP. Both promise at least two more years of belt-tightening. The opposition Labour Party, having opposed cuts at first, is now desperate to avoid seeming spendthrift, and also promises frugality. Only minor parties want an end to the cuts. But despite the seeming consensus, the spectrum of fiscal offerings is wide. How do the parties’ fiscal offerings compare?

There are two measures of the deficit. One is overall borrowing—the difference between spending and revenue, which must be financed in the bond markets—which stands at about 5% of GDP. The other is the balance on the current budget, which is overall borrowing less investment spending. Many analysts think that investment spending is special, in the sense that it will create future assets such as roads, schools and hospitals. Borrowing for investment makes more sense than borrowing for day-to-day spending on things like public sector salaries, because investments (the sensible ones at least) will raise economic growth in future and therefore the economy's ability to service its debt. Both measures of the deficit can be “cyclically-adjusted”—that is, tweaked to account for borrowing caused by temporary swings in the economy.

Last year the Tories, the Lib Dems and Labour all voted for legislation requiring that forecasts for the cyclically-adjusted current budget be in surplus three years in the future. At the time, that meant balance in 2017-18, which both the Tories and Lib Dems explicitly promise. But Labour say they will balance the current budget only “as soon as possible” in the next parliament—and by the time the next chancellor delivers a budget the three year target will have shifted to 2018-19. Strong economic growth in the extra year could mean that fewer cuts are necessary. But the biggest difference between Labour and the Tories is that the latter want an overall surplus—including investment spending—by 2019-20. That will require cuts to government departments of roughly equal size to those already made. By contrast, on today’s investment plans Labour could borrow £30 billion more than the Tories by 2019-20. That is a huge sum, equivalent to roughly a quarter of the entire NHS budget. Labour would not need to spend the cash on new investment; the leeway could be used to soften cuts to day-to-day spending. On current growth forecasts the Institute for Fiscal Studies, a think-tank, predicts Labour could in fact boost departmental spending slightly and achieve current budget surplus in 2019-20.

In its manifesto Labour emphasised prudence; it proudly claims all its planned new spending is fully funded by new taxes. Similarly, the UK Independence Party commissioned a consultancy to audit its manifesto, and claims that its pledges would not increase the deficit. Yet the most meaningful promise when it comes to fiscal policy is the overall deficit target, not whether two sides of a manifesto balance. The overall target dictates what happens to government departments, public sector pay, jobs and—notably—welfare. The Tories promise a massive £12 billion in welfare cuts, but will not specify where the axe will fall. On the overall target, the gap between the two main parties is the biggest it has been for at least five elections. Whether any voters have noticed is another matter.

Dig Deeper:
A detailed look at the parties' fiscal plans (April 2015)
Markets are sending the parties mixed pre-election messages (April 2015)

Discover more

Gaza could face a famine by May. What does that mean?

Some parts of the strip are already experiencing “catastrophic hunger”

What is the Islamic State Khorasan Province?

The group that claimed responsibility for the Crocus City Hall attack is a growing threat to Russia—and the West


Will Texas succeed in enforcing its own immigration law?

The state’s latest challenge to the federal government’s powers, SB4, is in limbo