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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of England
Elections are rarely edifying economic events. Despite the recent arrival of manifestos from the two main political parties, the UK’s seems unlikely to buck this trend. Thus far, the debate on tax and spending policies has been obscured by fiscal fog. At the macroeconomic level, it has established little beyond the narcissism of small fiscal differences.
On the face of it, these fiscal differences are not insignificant. Under Conservative party plans, tax and spending are both lower than under the latest projections from the Office for Budget Responsibility. Under Labour’s plans, both will be higher. By the end of the next parliament, taxes and spending are projected to be around £25bn higher under Labour than the Conservatives and the tax take as a share of GDP around 0.5 percentage points higher.
In practice, however, this overstates the likely fiscal and macroeconomic differences between the parties. Labour’s proposed additional spending is about one-tenth and one-fifteenth respectively of proposals in their 2017 and 2019 manifestos. The proposed public spending increment is less than a weekend’s GDP under Labour plans, and little more than a long weekend’s GDP under Conservative plans.
So while the distributional consequences — the winners and losers — of the fiscal plans do differ, there is unlikely to be much more than a lettuce leaf between the main parties in aggregate growth terms. This is the logical consequence of them committing to near-identical fiscal rules — in particular the requirement that debt relative to GDP is falling in the final fiscal year.
These self-imposed constraints are generating difficult fiscal choices which, so far, have largely been ducked by both parties. This has been called a “conspiracy of silence” among politicians. It is worth breaching this omerta to consider which of the available post-election options is likely to be least unpalatable and hence most likely, whoever wins.
Four options are available. By far the least painful and least likely is a spontaneous growth surge. That would immediately relax fiscal constraints and open up fiscal space. It is certainly possible that a reduction in post-election uncertainty could boost business investment and big-ticket household spending.
Whether such a relief rally could be sustained into higher medium-term growth is another matter. The omens are not good. For example, both parties project a fall in public investment as a share of GDP over the next parliament, from a base several percentage points below the UK’s competitors. We can hope private investment fills the gap. But hope is not a growth strategy and private investors might be cautious about rushing in where public investment fears to tread.
Absent the growth fairy, the other options are considerably more painful. Both manifestos implicitly assume existing departmental spending plans are adhered to. With low growth and limited fiscal headroom, these imply sharp real-term cuts in public spending across a range of non-protected departments. This may not be full-fat austerity, but it is no better than semi-skimmed. And it would come against a backdrop of already fragile hospitals, schools, universities, councils, justice and social care systems. In the absence of a visitation from the public sector productivity fairy (also unlikely), this degree of austerity seems unlikely to be politically tolerable.
The alternative means of book-balancing is tax rises — or, more accurately, further tax rises since both parties’ plans envisage a rising tax burden. But increases in main tax rates have been disavowed by both parties. Labour has ruled out rises in income tax, National Insurance, corporation tax and VAT rates, together comprising three-quarters of tax revenue.
Which leaves the final option — waiving the UK’s fiscal rules, notably on debt. That, historically, has been the path of least political resistance, they have been adjusted seven times since 2010. Given the high political and economic costs of the alternatives, modifying the UK’s fiscal rules is once again likely to be the most politically expedient post-election choice, whoever is in government.
Fortunately, it is also the most coherent economic one. Existing fiscal rules risk starving the economy of the very investment needed to boost medium-term growth and, ultimately, pay down debt and lower taxes. So when the UK’s fiscal rules are junked post-election, rejoice rather than lament their passing. It will be an all too rare example of politics and economics aligning.
