£31bn difference remains between parties’ latest fiscal plans

Living standards are higher or lower depending on the measure used; a welcome abolition of the ‘poll tax’ on self-employed; and rise in personal allowance poorly targeted

The difference between the parties’ fiscal targets has narrowed – but could still be as much as £31bn by the end of the parliament – the independent think-think the Resolution Foundation said today (Wednesday) in response to the Budget.

The Resolution Foundation has used the latest OBR projections to update its analysis of the fiscal choices facing the next government. It finds that, relative to the base year of 2015/16;

• The target of a balanced cyclically-adjusted current budget will, as things currently stand, require total fiscal consolidation of roughly £16bn in 2017/18 (in 2014-15 prices).
• In the first two years of the next parliament the pace of cuts to public services will accelerate compared to now. However, the new Budget figures represent a reduction in the pace of departmental cuts in these years compared to the plans set out in the 2014 Autumn Statement.
• Delivering the Conservative’s target of a £5bn overall budget surplus in 2018/19 implies fiscal tightening of around £35bn in 2018/19. Planned spending is then set to increase significantly in 2019/20, representing a major loosening relative to the Autumn Statement.
• Labour’s target of reaching a current balance by 2019/20 at the latest would now be compatible with an increase in spending or reduction of taxes of £11bn in 2019/20 relative to 2015/16. However, to achieve current balance in 2017/18 it would still have to make major cuts in the first half of the parliament.
• By 2019/20, the difference between Labour and the Conservatives would be £31bn, with the Liberal Democrats lying somewhere in between.

Matthew Whittaker, Chief Economist at the Resolution Foundation, said:

“The differences between the parties’ fiscal targets may have narrowed considerably since last December but they are still highly significant. The economic picture is improving but really tough decisions will still be required to meet these targets. Based on these new plans there is a ‘bust to mini-boom’ pattern of consolidation, with deep tightening in the first half of the parliament followed by significant loosening. All parties still need to close the candour deficit and spell out what their fiscal targets mean for taxes, welfare and the shape of public services.

On specific Budget measures

The Resolution Foundation welcomes the abolition of Class 2 National Insurance contributions for self-employed workers – which it believes is a ‘mini poll tax’ on the self-employed – though it notes that no date has been set for this policy and that there are wider problems in the taxation of the self-employed that need to be resolved.

The Foundation argues that a further rise in the personal tax allowance is a poorer use of scarce resources and is badly targeted. It notes that more than five million of the lowest paid workers will gain nothing at all from this measure and three quarters of all the gains flow to better-off households. With all parties committed to poorly targeted tax cuts in the next parliament, it urges a major rethink of ways to help low-income households in the tax and benefit system.

Matthew Whittaker said:

“Abolishing the ‘mini poll tax’ for the self-employed will be warmly welcomed by millions of low-earning self-employed workers. This anomaly in the tax system hits the lowest paid the hardest and it is important that this is brought forward as soon as possible.

“The latest rises in the personal allowance are a poor use of scarce resources. The fact that they aren’t being brought in immediately as had been rumoured means that inflation is doing some of the work of raising the allowance, which reduces the cost to the exchequer. “

On wages and living standards

The latest OBR figures show that real household disposable income (RHDI) will be higher this year than in 2010. However, the Resolution Foundation believes this measure is flawed as it includes things people wouldn’t usually consider income, such as imputed rents, as well as the incomes of universities and trade unions. By updating its preferred measure of household incomes, the Foundation finds that average incomes remain around 4 per cent below their pre-downturn peak and are still some way below their 2010 level.

Resolution Foundation analysis of the latest OBR figures shows that typical weekly earnings are expected to rise to £452 (in 2015 prices) by 2020, just short of their pre-downturn peak (based on CPI). However, using its own RPI-J forecast, the Foundation expects the weekly wages of a typical worker to increase by £17 a week by 2020, leaving them still some way short of their pre-downturn peak.

Matthew Whittaker said:

“Strong employment growth has meant that average household incomes have recovered much faster than wages. But the claim that living standards are now above their 2010 level is debatable. It’s true on one measure but not on others. On our preferred measure, we believe that while average incomes are rising, they’re still around 4 per cent short of their pre-downturn level.”

“After seven years of falling pay, it is welcome to see real wages rising again and the medium term outlook improving. But there is still a long way to go. Typical earnings aren’t expected to return to their pre-downturn level until after the end of the next parliament.

• The Resolution Foundation median wage projection is based on the OBR forecast for mean weekly earnings. We convert to the median by applying to the OBR’s figures the historic ratio (1997-2007) between average annual growth in mean and median weekly wages as recorded in the ONS Annual Survey of Hours and Earnings