UK Economic Policy: Where Do The Parties Stand?

by Oliver Wratten

A guide to the stance of Britain’s main parties regarding the economy

Despite the recent decline in British public opinion regarding the importance of economic performance, the issue remains pivotal in determining the sway of voters. As a subject with such broad horizons, debate concerning the nation's welfare is inevitable: our democratically elected parties hold different opinions on what they believe is best. But what is it that they believe?

George Osborne, Conservative
Chancellor of the Exchequeur

The Conservatives’ primary aim is to eradicate the budget deficit by 2018. Contrary to their approach in the 2010 election, David Cameron has promised income tax cuts for 30 million people by 2020. This includes raising the point at which tax is introduced from £10,500 to £12,500 per year (at a cost of 5.6bn) and the 40% higher tax rate from £41,900 to £50,000 (at a cost of 1.6bn) - both by 2020. Reducing spending by an estimated £25bn is pivotal in order for the plan to work; this, in combination with economic growth, is necessary for covering the cost of tax cuts and paying off UK debt.

Notably, there is no guarantee not to raise VAT. During the current period, this is what they have done. When questioned about a shift of focus from progressive income tax to regressive VAT, Cameron has declined to comment - most likely, he would implement this. In a capitalist society with already existent social disparity, worsening the situation for the poor relative to the rich may be political suicide with regard to the working class vote.

Immediately, there are questions raised over the negative knock-on effects of reduced government expenditure. Granted, the Conservatives have guaranteed an increase in NHS spending. But what about the other state provided goods and services, including justice and the environment? Last week, George Osbourne announced that both would see spending decreased by 10% - an amount significant enough to have social repercussions where these departments are concerned. Possibly more alarming is the lack of an injection into education: the budget will remain stable should the Tories be re-elected.   Whilst education expenditure may be stable in nominal terms, it is technically losing purchasing power when inflation is taken into account. Given that education policies comprise the conversion of 3500 schools that are deemed as “requiring improvement” by Ofsted into academies, a lack of alteration to the budget may pose financial problems.  At some point, Nicky Morgan will plunge into the piggy bank of educational funds and emerge empty handed… either that or spending will have to be increased - somewhat of a policy conflict.

Conservative economic performance during their time in power is a useful gauge for what the future may hold. The data depicts fairly stable, low levels of growth in real GDP on a quarterly basis. In the short term, this is less than ideal; social welfare is recovering at a slower rate than expected. However, Cameron has emphasised that his sights are set on “securing a better future”. As his party so keenly advocate, they have reduced the budget deficit from 10.2% in 2010 to 5% as of now. What they don’t emphasise is that this is a percentage of expenditure - they are by no means reducing the deficit, merely slowing the rate of increase. True, they aim for a surplus by 2020 - but can we really trust the chancellor after the failures of his last term in office?

Ed Balls, Labour
Shadow Chancellor of Exchequeur

Labour will attempt to achieve a budget surplus “as soon as possible”, by eliminating borrowing for new spending and placing a heavier tax emphasis on the higher band earners. For salaries over £150,000, Labour would reintroduce the 50% income tax rate. Additional reintroduction would apply to the 10% income tax rate (before its abolition in 2008, the next £2,230 of income after the personal allowance was taxed 10% - after this, it rose to 22%), a cut benefitting 24 million people. A mansion tax on properties worth over £2 million would raise £1.6 billion. UK government ministers would see a pay cut of 5%, and bankers would be taxed on their bonuses. Finally, Labour would pile the pressure upon overseas tax havens; unless they cooperate in fighting tax avoidance, the government would encourage their placement on an international blacklist.

The lack of an assurance to cut spending casts doubt over the security of Labour’s economic plan. No borrowing for new spending conveys nothing with regard to the level of borrowing for current spending - contrary to Ed Milliband’s statement promising to achieve a budget surplus. If dubious Conservative claims that £20.7 billion of Labour spending will be unfunded are to be believed, then there are evidently some serious problems at hand. Admittedly, this statistic is most likely far from accurate. However, any amount of excess expenditure increases the budget deficit and the rate of increase of debt. Another factor that will surely be considered by voters is the aftermath of the Blair/Brown reign. Between 2001 and 2008-2009, government spending increased from around £400 billion to £618 billion (in real terms, 2009 base year). With an apparent policy of spend, spend, spend, Labour saw the consequences of running a deficit during a boom come back to bite them.

Narrowing the gap between the super rich and the relatively poor is a vision of great popularity amongst the masses. Equality is definitely something we should look to increase and Labour plan to do so by shifting the weight of taxation from the shoulders of those in relative poverty to the most prosperous earners in the UK. However, the implementation of policies to achieve this has to be approached with caution. If net incomes for those at the top of the earnings ladder are too low, there is less incentive for them to work as hard. As a significant proportion of these people are business owners, they may decrease research and development spending due to lower potential long term profit. Raising taxation any higher may result in increased net emigration, as skilled labour moves to places with lower tax rates. Furthermore, the efforts foregone in tax avoidance may rise proportionally to tax increase, which could cause an overall decrease in government revenue. One evident result of the Conservative decrease in income taxation for the higher band was an increase in tax revenue; Labour may actually be inhibiting their potential revenue gain.

Danny Alexander, Liberal Democrat
Chief Secretary to the Treasury

The Liberal Democrats would raise the personal allowance to £11,000 by April 2016, and to £12,500 by 2020. They have assured that the budget deficit will be eradicated by 2018 under their contractionary fiscal policy scheme. Having invented mansion tax, the Lib Dems would operate it conversely to Labour; relating it to the council tax bands with band widths varying from those outlined by Ed Balls. Capital gains tax would be raised from 28% to 35% and corporation tax would be increased by 8%, in order to raise and extra £1 bn towards reducing the budget deficit.

In a similar fashion to Labour, the Lib Dems focus on redistribution of wealth; it is quite apparent that there is a tax reposition emphasis from the lowest earners’ band to the highest. However, the Lib Dems would face additional problems to Labour where tax raises are concerned. A significant rise in the level of corporation tax will mean that firms profit sees a fairly heavy decrease. There is less that they can spend on employing new workers and R&D, inhibiting potential growth long term. Unlike Labour, Nick Clegg will look to negotiate with tax havens rather than persecuting them. This plan has one large fundamental flaw: overseas demand is the basis of the economies for countries such as the Cayman Isles and Guernsey. In the Cayman Isles, the financial service sector accounts for 54% of GDP; losing clientele would result in devastation. The Lib Dems plan to dedicate only £917 million into combating tax avoidance and evasion overall - the proportion of this spent on subsidising tax haven banking will be relatively small (when compared to the gap left behind), meaning that cooperation is improbable.

Pushing up capital gains tax will have an adverse influence on both government revenue and aggregate demand. Evidently, the rate of this tax is directly proportional to the efforts foregone in avoidance. The resultant consequence of greatest devastation is, perhaps, a decrease in real output. If investors in equities are exposed to a lower reward for their risk, the likelihood of holding a stock indefinitely increases. Crucially, there is less incentive for an initial outlay. Decreasing the potential for profit is instantly detrimental to investor confidence. Net investment would see decline, reducing demand in an economy and real GDP as a result. Giving the working classes motivation to work hard is a good enough policy, but when accompanied by a decrease in demand for labour it poses a catastrophic transitory unemployment issue.

One key point of note is that, regardless of the electorate’s general stance on Lib Dem policies, their only possible stab at having economic influence will be in a coalition. As the minority, they must shout to be heard. If the current coalition is a platform for judgement, then the voters in yellow will think twice before restating their support - Nick Clegg and his party seemed to lose their voice on too many an occasion. Above all else, the Lib Dems stated that they would try to abolish tuition fees, promising that they would not rise whilst they formed part of government. In short: they failed, denting supporter confidence and even stimulating ridicule nationwide:

The UK Independence Party would relax taxation for the majority of the population. They would change the personal allowance to £13,500 by 2020. Earners of £42,285 - £55,000 per year would pay 35p income tax, whilst any with a higher salary would pay 40p. Inheritance tax would be abolished, and corporation tax replaced by a “turnover tax” - a progressive tax based on the number of sales as opposed to profits. Critical in terms of UKIP’s political stance is the economic benefit that would be reaped from fulfilling foreign policy objectives: £8 bn per year saved in EU membership fees and foreign aid cuts of £9 bn.

Patrick O Flynn, UKIP
Economics Spokesman

Instantly apparent is the astronomical loss in tax revenue. A personal allowance of £13,500 means that no full time workers on minimum wage will be taxed, at an estimated cost of over £10 bn from the IFS. Furthermore, whilst more of the higher band earners may cease to avoid income tax at a lower rate, there will inevitably still be previously non-existent holes in receipts. The EU membership payment savings would be utilised to plug the gaps, but this hinges upon a UKIP government’s ability to renegotiate trade deals with EU countries as an outsider. Any additional spending, such a the £3 bn Farage plans to inject into the NHS, is also accounted for by a lack of EU membership and foreign aid cuts. Whether or not these alone can compensate for the gross elevation in the spending total is doubtful.

UKIP’s turnover tax is almost a declaration of war on the corporate elite, a method looking to achieve results similar to those of Labour’s battle against tax havens. It may sound equitable, but definitely has its drawbacks. The tax is yet to be devised and outlined in legislation, but large firms with the resources to spend on litigation will probably have more opportunities to exploit loopholes than small businesses, increasing monopoly power in any given market. If by some chance the law functions perfectly and all UK firms are forced to pay, investor confidence in profit may deteriorate. Revenue from turnover tax may initially spike relative to its abolished counterpart, but if investment is lowered then aggregate demand could be too. After a period of time, the percentage of profits gained by the government may be higher, but there could be less of these profits to gain from.

Cutting foreign aid by around 85% causes a great moral dilemma, splitting UK citizens into two camps. On one hand there is a belief that, as a nation, we should be doing our best to provide basic resources (e.g. food, water, clothing, education) for those in a situation of absolute poverty and despair that need it most. On the other hand, some British people think that we should focus on fixing domestic problems as opposed to those in far away lands. Whatever the opinion held, there is no denying that this decision would be controversial. However, it is essentially irrelevant. UKIP have already ruled out a coalition and any deal in which they are involved would probably compromise most of their policies. Their influence would most likely be in the areas where their votes are won: the enforcement of a referendum on EU membership and immigration policy.