Britain’s three main parties are failing to come clean about the tax and spend trade-offs ahead

Tax and spend usually comes to the fore in elections and this winter poll is proving to be no exception. The tension between politicians’ eagerness to promise higher spending and their reluctance to divulge the tax bill is all the greater this time because it follows a decade of austerity. How far that should now be reversed is a central political question, determining in turn how much taxes must rise. It comes at a time when the fiscal costs from population aging are mounting while big investments are needed to mitigate and to adapt to global warming. And hanging over everything is the potential fiscal damage from Brexit, especially if it is a hard break with the EU.

How do the budgetary promises and pledges of the Conservatives, Labour and the Liberal Democrats measure up to the challenge ahead? Judging by today’s analysis of the manifestos and costings from the Institute for Fiscal Studies, neither of the two main parties passes the credibility test, though they fail in different ways.

Start with Labour. No one could accuse their manifesto of a lack of ambition, with its decision to ramp up both public investment—by £55bn a year—and day-to-day spending—by over £80bn a year, in each case above existing government plans for 2023-24. Theirs is the biggest commitment to prepare for climate change through their green industrial strategy. And they want to do the most to reverse austerity.

The trouble with the manifesto is not the objective of a bigger state in itself. As the IFS points out, even after Labour’s planned surge in spending, Britain would still be below Germany and several other European countries in the scale of public spending as a share of GDP. Rather it is the unwillingness to accept that a bigger state must involve higher taxes on all taxpayers. Labour’s claim to spare taxpayers other than the top 5 per cent does not acknowledge the fact that higher corporate taxes will be passed through to wage-earners in lower pay or to consumers in higher prices or to shareholders, who include people with pension plans.

Another weakness in Labour’s offer is that it fails to meet the challenge of population aging. The commitment to freeze the state pension age at 66 rather than to let it rise to 69 by the mid-century stores up trouble ahead. Meanwhile Labour’s manifesto costings do not include the offer of financial redress to the cohort of women who have lost out as their state pension age has risen from 60 to 66 in this decade. The bill to honour this pledge is put at £58bn.

If Labour fails the credibility test by not confronting voters with the tax bill they will have to pay for a bigger state, the Conservatives fail it by promising too little. We are asked to believe that Chancellor Sajid Javid’s spending round in early September is a one-off, with little extra spending for public services (other than health and education) to come beyond 2020-21. That in turn enables the Tories to keep the flame of lower taxes alight, with next year’s cut in national insurance through raising the threshold at which it starts to be levied supposedly a down-payment to further relief beyond that. Over and above that the Conservatives vow not to raise income tax, NI or VAT rates even though these three taxes are the big money-spinners for the exchequer.

The Conservatives’ sums add up only because they are not coming clean about the spending increases they too seem bound to make. With the NHS in such a mess, even more money will be needed to repair its services. The Tories have barely acknowledged the public costs of greening the economy. But more than the implausibility of the Conservative spending plans, the real deceit is that they make no allowance for the economic and fiscal damage of a no-deal Brexit at the end of next year, a risk that has come into sharp relief given their commitment (highlighted in bold in their manifesto) not to extend the transition period beyond December 2020.

Unlike the two main parties, the Liberal Democrats offer a more coherent set of budgetary plans. Their spending commitments (other than a massive expansion of free child care) are more restrained than those of Labour and they have been more open about the general tax increases needed to finance them, including a 1 per cent rise in income tax rates. But as the election appears to be turning into a two-horse race, the Lib Dems’ more virtuous fiscal approach appears not to be appreciated.

Inevitably the gap between higher spending (openly declared by Labour, concealed by the Conservatives) and insufficient taxation will lead to higher borrowing. All three parties claim that their plans are consistent with the fiscal rules they will adopt. But they all also know that whatever straitjacket they put on, they can take it off if necessary.

The lesson of the past 20 years is that there is one fiscal rule that rules them all: chancellors abandon the old ones when they are going to miss them and set new ones that they think they can meet. In 2016 Philip Hammond discarded the rules he had inherited from George Osborne and pledged instead to ensure that borrowing was below 2 per cent of GDP in 2020-21. Even though that rule will in practice be broken, it won’t matter because if the Conservatives regain power they will be following three new rules set by Javid.

Britain has long tried to have the best of two worlds, combining a European welfare state with an American tax burden. Now more than ever that endeavour looks increasingly shaky. This election was an opportunity for the political parties to spell out how to finance good public services in an ageing society. All three have failed to grasp it.