If elections really are won and lost on the economy, then the recent election campaign announcements by Labour and the Conservatives deserve our close attention.
Encouraged by low interest rates, and hence low government borrowing costs, both main parties have pledged to borrow more money in order to spend more. In other words, both Labour and the Conservatives risk increasing the national debt.
While this comes as little surprise from a Labour party that believes that any problem can be solved if you chuck more money at it, the Conservatives will be hoping that voters and investors believe their claim that they will borrow more responsibly and spend more responsibly.
Labour’s £400bn spending splurge consists of a £250bn for a green transformation fund to be spent on energy, transport and other networks to decarbonise over time, and a £150bn social transformation fund over five years, to be spent on schools, hospitals, care homes and council houses.
While admitting that Labour would be adding to the national debt, their current shadow chancellor John McDonnell claimed that the extra spending would also add to the government’s assets, with the income from council homes’ rents and electricity from state-owned suppliers being set against the cost of servicing the debt issued to build them.
In addition, he established a new fiscal rule for the next parliament to classify borrowing (deemed to be) for investment as outside borrowing targets. The aim is clearly to make it easier for Labour to claim an improvement in the overall balance sheet by the end of the parliament.
However, any repayment of debts would be capped against an equivalent of 10 per cent of tax revenue. In other words, the repayments could be capped at less than the cost of sustainably servicing the total debt, allowing it to possibly spiral out of control.
In response, the chancellor, Sajid Javid, has ripped up his party’s current fiscal rules to maintain public borrowing below two per cent of GDP, to aim for a balanced budget in the 2020s and to reduce the national debt as a share of national income annually.
He announced new rules to borrow and spend up to 3 per cent of GDP, resulting in an extra £22bn a year. Like Labour, the Conservatives also claim that their extra borrowing and spending should be viewed as investing in Britain’s future.
The difference is that they would aim to balance the budget in normal times, which begs the question of how you define “normal times”?
While Conservatives normally like to share the fruits of their responsible management of the economy by means of tax cuts, allowing taxpayers to keep more of their income, there was no firm pledge. Instead, Sajid Javid claimed that “within these rules … [we can] have tax cuts, invest in infrastructure and balance the day-to-day funding of the economy”
Many taxes and regulations that affect entrepreneurs and small and large businesses are long overdue for reform. Unfortunately, both main parties have dodged tackling the big questions around such reform.
Instead, the Conservatives plan to postpone cuts to corporation tax, while Labour has pledged to reverse any cuts. Both parties ignore or prefer not to believe research showing more than half the burden is borne by workers.
Instead of reform to prepare the economy for the future, Labour plans for renationalisation not only come with a hefty price tag but would also create state monopolies in key sectors of the economy, reducing choice by driving innovative competitors out of business.
Interestingly, both John McDonnell and Sajid Javid gave their campaign speeches in the north to underline their determination to be less London focused. Pledging that Labour’s treasury ministers would meet outside London and have a ministerial office in the north, John McDonnell claimed that the “centre of political gravity … is shifting away from London.”
But as my IEA colleague Emma Revell pointed out, a better way to shift political power away from London would be by fiscal devolution, allowing local authorities to raise more of their own revenue to spend locally as they saw fit, instead of relying on funding approved by a remote central government, whether Labour or Conservative, based hundreds of miles away in London.
John McDonnell claimed that Labour’s programme stands “in the best tradition of British socialism”, following in the footsteps of previous high borrowing and spending chancellors Hugh Dalton and Gordon Brown.
By contrast, the Conservatives have postponed plans for reform while claiming that they will borrow more responsibly and spend more responsibly, which sounds remarkably like claiming to run socialism more responsibly than socialists.
Whether voters prefer Labour’s socialism or the more responsible socialism of the Tory party, however, remains to be seen.