IFS casts doubt on credibility of Tory and Labour tax and spending pledges
Both parties would struggle to deliver on their plans, says the think tank.
Neither the Tories nor Labour is offering a “properly credible prospectus” in their General Election manifesto spending plans, a leading economic think tank has said.
The Institute for Fiscal Studies (IFS) said it was “highly likely” that a Conservative government would end up spending more than the party’s manifesto implied – meaning either taxes or borrowing would have to rise.
It said that Labour would not be able to deliver on its promise to raise investment levels by £55 billion a year as the public sector does not have the capacity to “ramp up” that much that quickly.
It was “highly likely” that a Labour government would have to find other tax increases beyond those it has announced for big business and the better off if it was to raise the extra £83 billion a year in additional revenues it wants.
“In reality, a change in the scale and the scope of the state that they propose would require more broad-based tax increases at some point,” said IFS director Paul Johnson.
Mr Johnson said that the chances of the Conservatives being able to hold spending down over the course of a five-year parliament in the way that they proposed appeared to be “remote”.
“Why have they been so immensely modest in their proposals? Because to do otherwise would either mean resiling from their pledge to balance the current budget or would mean being up front about the need for tax rises to avoid breaking that pledge,” he said.
Presenting the analysis of the election manifestos of the main parties, Mr Johnson said the choice between the Tories and Labour could “hardly be starker”.
He said the Conservative plans if delivered would leave public spending – apart from health – still 14% lower in 2023-24 than it was when the Tories came to power in 2010-11.
“No more austerity perhaps, but an awful lot baked in,” he said.
In contrast, he said that Labour would raise both taxes and spending to peacetime highs, with the national debt set to rise by around 3% of national income.
However, he said that Labour’s promise to abolish in work poverty within a parliament was “not achievable”.
And he expressed concern about about its pledge to commit £58 billion to compensate the so-called “Waspi women” who claim to have lost out as a result of pension changes under the coalition government.
He said it mean spending more on a group who were on average “relatively well off” than the party was proposing to spend on the much larger and much poorer group of working-age benefit recipients.
“To believe the whole group should receive compensation is a recipe for complete stasis in policy,” he said.
“Clearly some suffered hardship and there may be scope for much more limited compensation.”
Higher rates of corporation tax discourage investment in the UK and therefore reduce the tax on profits and wages in future Stuart Adam, IFS
IFS deputy director Carl Emmerson warned there was still a risk of a no-deal Brexit under the Conservatives if Boris Johnson was unable to get a free trade deal with the EU by the end of 2020.
He said that would be “economically damaging” and could mean a return to austerity if it resulted in a “big downturn”.
In the short-term, he suggested borrowing would have to rise to even higher levels than that planned by Labour with the national debt reaching up to 85% of GDP.
In order to repair the damage to the public finances, he said: “A return to austerity would be perhaps the most likely outcome, not immediately but in the medium-term.”
IFS senior research economist Stuart Adam said Labour was wrong to claim that 95% of the population would not be affected by its planned tax increases.
“That is clearly not true,” he said.
Abolishing the marriage allowance and raising the tax on dividends would affect people across the income distribution spectrum, he said.
At the same time, he said the planned increases in corporation tax would also have a wider impact than simply the businesses which paid it.
“Given that there’s a good chance that the corporation tax rise would result in at least some increase in workers’ wages and some increase in prices, that would suggest most people would be affected in some way,” he said.
He warned that over the longer term, Labour was unlikely to bring in the £24 billion-a-year it was predicting from the increase.
“Higher rates of corporation tax discourage investment in the UK and therefore reduce the tax on profits and wages in future,” he said.