In the U.K., both the Conservative and the Labour Parties are openly campaigning for the upcoming 12 December election on ending fiscal austerity and turning on the government spending tap, albeit now that the Conservative Party has clarified its manifesto, to vastly different degrees. If voters can put aside BREXIT for a moment, which of course is not easy, they will be left to consider the economic effects of each parties’ fiscal plans on the U.K., which could – at least in my opinion – potentially change the very fabric of the U.K. economy in the coming years depending on which party wins this election.
The annual spending budget and the investment programme announced by the Labour Party in their manifesto are eight times and at least two times (and possibly more) greater, respectively, than those presented by the Conservative Party in their manifesto. Both parties will fund their current spending programmes from current (i.e. tax) revenues, but whereas the Conservative Party will slightly reduce taxes to fund its modest increase in spending, the Labour Party has announced rather material across-the-board tax increases in individual and corporate taxes to fund increases in current expenditures that are 10 times higher than the increases in current expenditures proposed by the Conservative Party. In addition, Labour is proposing around £400 billion of new investment expenditures over the next 10 years (so assume £160-180 million through this Parliament, or 2023-24), to be largely debt-financed, while the Tories are proposing incremental investments of maximum of £80 billion through this Parliament, of which only £22 bln have been identified. In 2023-24, the Conservative Party is projecting net investments of a maximum of 3% of GDP (of £2,271 bln), while the Labour Party is projecting investments of 4.5% of GDP the same year (of between £2,275 bln and £2,281 bln). Naturally, the Labour Party fiscal plans will result in higher debt-to-GDP and deficit-to GDP in the U.K by 2023-24 as their plans reflect a tilt towards a more socialist government model.
Having been over the manifestos and accompanying financial documents from both parties, I did not necessarily find them consistently presented or easy to compare, but I have provided some details below that you might find insightful, including links to the relevant documents.
Conservative Party: The fiscal features of the Conservative Party’s manifesto that were released over the weekend are only modestly deficit-increasing, at least compared to what the party was openly discussing in the weeks leading up to the formal manifesto, and are in fact net neutral on the current budget (i.e. annual tax revenues equal annual current expenditures). The net neutral current budget is in fact one feature shared between the parties’ fiscal plans although on vastly different scales. Apparently feeling increasingly confident in crushing Labour in the upcoming election, the Tories have also decided to scale back some of their previously-planned tax cuts (aside from increasing the NIC threshold) and have importantly promised a “triple tax lock” to include no increases in income taxes, national health taxes or VAT during this Parliament. So with some residual money in hand due to a slight windfall in the March 2019 budget, the Tories are able to provide a small number of not overly-ambitious new spending initiatives of around £10.1 bln over the Parliament period, including an increase in nurses in the NHS, an increase in police officers on the street, freezing university fees (at £9,250 / year), funding other education initiatives, and childcare initiatives. As further outlined in the Costings Document published alongside the manifesto, the Conservative Party will use the current surplus over four years (around £16 bln) along with (assumed) modest new government borrowings to fund up to £80 bln in incremental government investment projects although only £22 bln of such investments are included in their plan (so I consider the amount flexible). Identified investments include things like fixing potholes, improving transportation, investing in education, increasing social housing, reducing carbon emissions, and a few similar projects. This investment programme is in line with the November 7th increase in public sector net investment to a maximum of 3% of GDP (from around 2.5% currently). This programme should have a limited effect on the fiscal position of the U.K. over this Parliament.
Labour Party: For the Labour Party, their manifesto includes a substantial increase in current government expenditures through a variety of programmes, funded each year by a similarly substantial increase in tax revenues. The funding plan (“Funding Real Change”) released by the Labour Party includes £82.9 bln of incremental new spending initiatives over this Parliament period that includes higher spending on things like education (including eliminating university fees altogether), healthcare, local authority funding, Universal Credit reform, etc. These substantially higher current expenditures will be funded by significantly higher tax revenues, including increases in income taxes for those earning above £80,000, an increase in the corporate tax rate, higher taxes on dividends and capital gains, higher inheritance taxes, etc. In addition, Labour expressly states that it intends to invest around £400 bln in the coming 10 years split between green / environmental projects (£250 bln) and social transformation (£150 bln), although the timing of the investment over this period is not entirely clear. One clue though is that in 2023-24, the last year of the parliamentary budget, the Labour Party investment programme would require incremental borrowing of £55 bln (for that year only), or circa 2% of the U.K,’s GDP that year. To compare this to the 3% maximum of GDP stated by the Conservative party, the Labour Party plan would increase total government investment to 4.5% of GDP by 2023-24 (from around 2.5% currently). One more thing worth mentioning is that the Labour Party is projecting a multiplier effect on its investment programme that they expect will increase GDP (above that in the current budget) by 2023-24 by £4m to £10m, or even more, although one could argue that the counter-fiscal drag of higher taxes could mitigate this at least partially (not to mention potential effects of crowding out from the U.K government borrowing more).
The Conservative Party has delivered a less-ambitious manifesto as tactically, there is no reason for the Tories to be overly-ambitious at this point because they believe that there is far more support amongst the electorate for their fiscally-conservative approach vis-à-vis the free-wheeling plans that were released last week by the Labour Party.
One more thing - while the Conservative Party has adopted a low-risk approach, it is worth noting that the U.K. does in fact have borrowing capacity should it eventually be needed. I might even go as far as to say that some of the investment plans of Labour might make sense and might be eventually needed depending on the outcome of BREXIT and the response of the U.K. economy. I only say this because the Bank of England has very few tools left in its arsenal, and ultimately – as is being discussed much more aggressively now in Europe – such government stimulus might in fact be needed should U.K. economic growth be anemic post-BREXIT. This is all the more reason that the Conservative Party’s fiscally-conservative approach probably makes more sense because, assuming they win the upcoming election but the economy stalls due to the BREXIT resolution (or post-BREXIT trade agreements do not materialise as quickly as anticipated, by December 31, 2020 expected by the Conservative Party), then the government might very well need to employ more meaningful fiscal stimulus than the Tories are currently projecting to jump-start the economy.