Fiscal rules and constraints

The background to the general proposals on taxation and public expenditure is the time path for the next five years as envisaged by the present government. In brief summary, a fiscal rule that government debt relative to GDP should decline in the final years. Public expenditure on ‘protected’ areas (including education, health and defence) would rise at modest rates generally below what is required to meet increased demand. In the other non-protected policy areas there will be a fall to £18 billion (circa 0.7% of GDP). The proposals in the manifestos are generally set in terms of differences relative to that ‘baseline’.

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There is an adherence by Conservative, Labour and Liberal Democrat parties to a fiscal rule which envisages the current budget in balance, with borrowing for public investment subject to the national debt to GDP ratio declining by the end of the Parliament. The general framework appears to be unquestioned and nor is there any significant element of a different scale of budget deficits (whether up or down). The exception is the Green Party who ‘will not allow our country to be held back by fiscal rules that don’t serve us all – we’re prepared to tax wealth and carbon emissions and prepared to borrow to invest in a fairer future. We do however acknowledge that public expenditure can only be expanded as far as the economy has the capacity to absorb it without triggering dangerous levels of inflation. This would be our overriding fiscal rule.’

 

There is a general approach to match proposed increases in public spending with proposed increases in taxation from specified changes: often at the overall level, though in the case of the Labour Party on an item by item basis. This approach has some attractions in bringing together something of the scale of changes which each party is proposing. The limitations of this approach should, however, be recognised. Proposals such as ‘close tax gap’, and so on are inherently difficult to put a figure on (and in the manifestos which mention that little has been done to show how the figures used are arrived at). The tax proposals make little allowance for behavioural change consequent on the tax changes. The expenditure costings focus on the gross cost, without any allowance for tax 
 
revenues arising from the recipients of the public expenditure (for example, income tax and national insurance paid by those thereby employed). There is no discussion of the impacts, positive or negative, of the proposed increase in public spending.

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Taxation

The tax initiatives which are proposed are generally on an ad hoc basis in a search for a funding stream to match against expenditure plans. There is little attempt to secure a more equitable tax regime.

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Tax proposals which relate to wealth are largely off the table. The notable exception is the Green Party who propose a wealth tax of 1% over £10 million and 2% over £1 billion. The Liberal Democrats, Green Party and Plaid Cymru propose raising tax on capital gains to income tax rates.

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Additional taxes on business are either virtually non- existent (Conservative, Labour) or targeted on specific sectors and on windfall or excessive profits. Banks (in the case of the Liberal Democrats) and oil and energy companies (in the case of the Green Party and others). Such taxes often rely on high interest rates (banks) and high oil prices (energy and oil companies) which may be an unreliable income stream.

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In respect of taxes designed to make the tax system more environmentally friendly: the Liberal Democrats propose additional tax on private jet flights, reform of aviation taxes and sewage tax on water company profits. The Green Party proposes a carbon tax, intending to raise up to £90 billion by 2030. In contrast, Reform seek savings of £30 billion by scrapping ‘net zero’, and also removing VAT on energy and lower fuel duty.

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There is generally little change proposed for tax on income: the Conservatives and Labour propose ‘triple lock’ of no increase in income tax, national insurance or VAT. There is a sleight of hand here as the tax allowance frozen in nominal terms leads to rising income tax payments as wages and prices rise. The Conservatives have proposed cuts in national insurance rates. The Green Party would abolish the ceiling on earnings for national insurance payments. Reform would raise the income tax threshold to £20,000 and higher rate starting point to £70,000.

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The main direct effect on children in poverty would come from removing the two-child cap on benefits. The Conservative Party rules that out though adjusts child benefit for high earners, benefitting those on incomes over £60,000. The Labour Party also rules out removing the two-child cap. The Liberal Democrats, Green Party and Plaid Cymru would remove the two-child cap.

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Public investment

The level of spending on public investment is likely to be constrained by the operation of the ‘fiscal rule’ rather than by the need for public investment, particularly in addressing climate change, or by the availability of resources. There is relatively little change in public investment proposed by the Conservative or Labour Party. Others recognise the need for higher investment. The Liberal Democrats offer an average over five years of £19.7 billion per annum of investment and the Green Party suggest raising investment to £90 billion by 2030 (focused on green transformation and social housing). Plaid Cymru have a range of ideas for energy transition. Overall it is worth noting that spending and tax are on course to diverge significantly, even if growth is reasonably strong, so that there is a need to find overall increases in the tax share of GDP, to bring the UK into line with comparable European countries and ensure that the government has sufficient resources to undertake needed activities.
 
Icon credit: Dewi Novita Sari/The Noun Project