A conspiracy of silence that will come back to haunt the winner

The economy has been at the heart of the general election campaign. Gordon Brown emphasises the need to support jobs and denounces Conservative plans to cut public spending by £6 billion this year as risking tipping the economy back into recession. David Cameron extols the benefit of making a start on deficit reduction in 2010/11 so that national insurance contributions do not have to rise in April 2011. And Nick Clegg calls for an increase in the personal tax threshold to £10,000 as a demonstration of the ‘fairness’ that is needed if the public are going to support tough measures on reducing the fiscal deficit.

But, as the Institute for Fiscal Studies (IFS) has made clear, all three main political parties have left more unsaid than said. In a detailed analysis of their plans, the IFS concludes that the Conservatives have not specified where £52.4 billion of deficit reduction would come from, Labour £44.1 billion and the Liberal Democrats £34.5 billion. It also said that ‘Labour and the Liberal Democrats would need to deliver the deepest sustained cut to spending on public services since the four years from April 1976 to March 1980’ while ‘the Conservative plans imply cuts to spending on public services that have not been delivered over any five-year period since the Second World War’.

Labour, the Conservatives and the Liberal Democrats have, simply, all been too afraid of the electoral consequences of spelling out where public spending will be cut and which taxes will increase after the election. All saw how the Tories’ ratings dipped in the opinion polls after their flirtation with ‘Age of Austerity’ rhetoric late last year and have concluded that, in a tight election, they cannot afford to tell the public the truth. Instead, they have, predictably, chosen to emphasise spending commitments (e.g. to the National Health Service), tax reductions (e.g. for married couples) or other positive stories (e.g. abolishing university tuition fees).

As a result, there has been far too much debate about whether it is a good idea to cut public spending by an additional £6 billion in 2010/11 and far too little about where up to £60 billion of cuts will come from in subsequent years.

In truth, the argument about the £6 billion of cuts was fought to a stalemate even before the election was called. Some economists say that it would take demand out of the economy at a time when the recovery was fragile; others suggested it would boost confidence and, thus, private spending. Whichever side is right – and I side with those who think cutting spending now is an unnecessary risk - the far more important issue is the make-up of the bigger spending cuts and tax increases that will inevitably follow.

This is not just a question of a democratic deficit – how can the electorate choose which party it wants to govern for the next five years if none of the parties will reveal its approach to the biggest issue that will face the government in the next parliament?

It is a problem for the parties too. Whether the election results in a majority Conservative Government, a minority Conservative Government or some sort of coalition or partnership (which, two days before the polls open, seem to be the three possible outcomes), the next government will have to implement unpopular measures on taxation and public spending, not just in its first few months in office but in every one of the next four or five years. And it will have to do so without having secured the support of the public for those measures. This will make it extremely unpopular. Indeed, Mervyn King, Governor of the Bank of England, is reported to think whichever party wins this election will not subsequently win another one for a generation.

Economists will recognise this situation as a classic game theory problem. If all the parties had cooperated and agreed to be totally open and honest about their spending and tax plans before the election, then the winner would be in a better position to implement its plans in the next parliament. But there was no such cooperation and no single party was willing to break ranks and be the first to set out its plans, for fear that the other two would not follow its lead and that it would lose support. Consequently, none acted and the result is a sub-optimal outcome for all concerned.

The consequence of this failure will haunt the next government every time it announces a tax increase or a cut in spending on public services.

This piece was first published on Left Foot Forward

Tony Dolphin

Labour and income inequality

The gap between rich and poor in the UK has widened since 1997, according to the results of a recent study by the Institute for Fiscal Studies. It found that income inequality in 2007-08 was higher than when Labour came to power and ‘higher than in any year since at least the 1950s’.

On the face of it, this is unwelcome reading for Labour supporters. What is the point of 13 years of Labour Government if it cannot prevent widening income inequalities?

Dig deeper into the IFS’s analysis, however, and it becomes clear that the gap between rich and poor has widened despite the Government’s efforts, not because of them. In the 1980s, when government policies seemed designed to benefit the rich, income inequality increased by an enormous amount. The increase in income inequality under Labour has been far smaller because changes to the tax and benefit system since 1997 have favoured poorer households at the expense of richer ones.

But what is missing from this analysis is an understanding of the causes of the increases in inequality that have occurred before the effects of government policy are taken into account. Throughout the last three decades, it seems, underlying inequality has been increasing. In the 1980s, this was exacerbated by government policy; over the last 13 years it has been mitigated by it. But under Conservative and Labour governments alike, it has remained a powerful trend.

There are a host of explanations for this trend, including globalisation, technological change and the dominance of the financial sector in the UK economy and we need to develop a full understanding of them because – as Richard Wilkinson and Kate Pickett have demonstrated so conclusively in their book The Spirit Level – greater inequality leaves everyone worse off.

So, while it is right to challenge the main political parties during the election campaign on how their tax and benefit policies might affect income inequality, it is perhaps more important to ask them what they intend to do about the growing disparity in pre-tax incomes. If they are, to quote Lord Mandelson, ‘intensely relaxed about people getting filthy rich’, they shouldn’t be.

Tony Dolphin

There are better things to tax than jobs

So the first big argument is over tax. Labour argues there will have to be a small increase in National Insurance contributions, as well as spending cuts, to help reduce the deficit. The Conservatives disagree, arguing that increasing NI contributions (which they describe as a tax on jobs) will be damaging and that they can close the deficit simply through spending cuts.

On the immediate row over National Insurance contributions, I guess Labour are right. Any incoming government will have to raise money quickly in order to get the deficit under control and it seems sensible to do this through a mixture of tax rises and spending cuts - to do it all through spending cuts alone would have a severe impact on public services and the wider economy. National Insurance also has the advantage of being a fair tax which varies according to the amount you earn. It’s not perfect - we already tax jobs quite heavily - but it’s the fairest way for a quick fix.

But while raising NI is necessary for achieving a short term goal, it falls woefully far of the bar as a long term policy on tax. Such a narrow debate misses the broader problem – that for the last few years Britain’s tax system has not raised enough to fund quality public services, that it disproportionately hits the poor, and that it lets important areas such as wealth and carbon emissions off the hook.

A more radical approach would be for politicians to try to tackle these bigger problems. It would shift away from taxing low and middle incomes (effectively a tax on people’s hard work and effort), towards taxing wealth (much of the wealth that is generated in Britain is based on little more than the luck of rising land and property prices and inheritance from family members).

In my opinion, an ambitious long-term pledge on tax might include:

1. A tax that captured a portion of rising land values and property prices
2. A 50% income tax for pay slips over £100,000 a year
3. A financial transactions tax or ‘Tobin Tax’
4. A tax that penalised carbon emissions

These would all take a while to put in place, and until that time NI will have to be raised to plug the deficit. But they are a more sustainable solution to funding the investment this country needs, and a far fairer way of doing it.

Jonathan Clifton

The problem with tax cuts

Liberal Democrat leader Nick Clegg used a speech to ippr yesterday (16 March 2010) to reiterate his party’s commitment to increasing the income tax personal allowance to £10,000 – part of their agenda of ‘fairness’ in their proposals for tackling the fiscal deficit. This is an expensive move that would cost £17 billion in lost revenue, but made cost neutral by removing some of the loopholes that allow the rich to avoid paying their fair share.

Tax cuts for the lowest paid, funded by the well-off – what’s not to like? But the problem with tax cuts is they don’t benefit the poorest families, where no one works or where earnings are below the existing personal allowance. This is an obvious point that Clegg is upfront about, but it’s vital – under his plans, £17 billion would be spent without any of the extra cash going to our poorest families. In a country with some of the highest child poverty rates in the developed world and little sign of extra money to tackle child poverty, there are better ways to spend £17 billion. Funnelling just £4 billion extra through the tax credit system could have halved child poverty this year.

Nick Clegg spoke about families on £30,000 feeling financially stretched. He was ‘unashamed’ that they would benefit from his tax plans. But what about families struggling to get by on the tiny incomes they get from out of work benefits or part-time low paid jobs? As we are constantly being reminded in this election campaign, politics is all about making hard choices. The progressive choice to make now to is stick to our child poverty targets and give ourselves the best chance of achieving them. Tax cuts for low earners may be a fine aspiration, something to look at when the public finances are in a healthier state, but right now we should be focusing any extra resources on those who need it most.

Kayte Lawton, research fellow, ippr