Political parties are failing to provide detail of deficit reduction plans for the next parliament

The UK’s main political parties are yet to provide voters with adequate detail to assess the far reaching implications of their deficit reduction plans for the next parliament, according to a new report published today (Tuesday) by the independent think-tank the Resolution Foundation.

With the coalition government expected to have delivered around half of its intended fiscal consolidation programme by the end of the current parliament, the debate around public finances during the next parliament will loom large over next week’s Autumn Statement and throughout the 2015 election campaign.

In the balance: public finances in the next parliament considers what we know – and what we don’t – about how each party plans to manage the public finances in the three years up to 2018-19, as well as the potential implications for spending cuts, tax rises and the pace of deficit reduction.

So far only sketchy details have been provided by each of the main parties about their plans for the period beyond 2015-16. The Resolution Foundation report makes a set of speculative yet plausible assumptions to help fill in some of the gaps.

According to OBR projections from Budget 2014, the coalition is thought to be on course to deliver a small overall budget surplus by 2018-19. This is based on the assumption that the £8.5bn of departmental cuts already earmarked for 2015-16 following Spending Review 2013 – which all parties have committed to – will be followed by a further £37bn of tightening in the three years to 2018-19.

The Conservatives have indicated that they will broadly match the existing coalition plans, securing around £37bn of further tightening in the next parliament, over and above the £8.5bn earmarked for 2015-16. However, they have specified that their new stance will involve formally switching from the coalition’s focus on achieving a current budget surplus (excluding investment spending) to a commitment to an overall budget balance instead. Their new commitment therefore makes it harder to ease off on deficit reduction in order to fund capital spending.

The Chancellor has announced that £12bn of this tightening will come in the form of additional welfare cuts, though he has only specified where one-quarter of this total will come from to date.  The Resolution Foundation research suggests that, even with these highly challenging reductions in welfare spending, the pace of cuts to public services would still need to accelerate after 2015-16 in order for the Conservatives to find the remaining £25bn needed to secure an overall budget surplus by 2018-19, particularly as the Chancellor has said that no new tax rises would be needed to meet this target.

The Liberal Democrats have said they will maintain the coalition’s focus on the current budget until 2017-18. Beyond that point they have said – unlike the Conservatives – that they will continue to have the freedom to borrow to pay for capital investment. However, they have specified that this freedom will only apply to “productive investment”, though they have not yet said how much of the capital budget this covers or how it will be distinguished from other types of capital investment. They have also indicated that fiscal consolidation in the next parliament should be achieved via an 80:20 split between spending cuts and tax-rises.

The Resolution Foundation estimates that, based on two different interpretations of what is meant by “productive investment”, this could mean spending cuts of £15-25bn; alongside tax rises of £4-6bn in the three years to 2018-19.

Labour has set out a less stringent and more flexible target, stating that they will aim for a current account surplus (rather than an overall budget surplus) “as soon as possible” in the next parliament. This formulation leaves open a wide range of possibilities. It means that Labour – unlike the Conservatives, but similarly to the Lib Dems – could continue to borrow against the £25-30bn annual capital budget if they wanted to. But they may choose any proportion of the capital budget; and nor is it clear what “as soon as possible” might mean. One possibility is a similarly tight timetable to the coalition parties. Alternatively, Labour could follow a slower path of consolidation.

The report considers the implications of two scenarios for Labour: reaching current balance in 2018-19 or 2019-20. This would mean further consolidation of between £13bn and £4bn (respectively) over the three years after 2015-16 (on top of the £8.5bn of cuts already scheduled for 2015-16). Labour hasn’t made clear its preferred split between spending cuts and tax-rises in relation to future consolidation. A less severe path of deficit reduction means, all else equal, higher levels of debt (and higher debt interest payments for longer).

The report highlights that all parties are likely to find further reductions in spending over the next parliament harder than those that have already been achieved. Many of the ‘easiest’ cuts will have already been made, while the parties’ assumed ongoing commitment to protect specific budgets such as health, schools and development will place an even greater strain on non-ring fenced departments.

In the balance also points out that while no party has specified any major new tax rises to assist with deficit reduction, they have all made tax cut commitments, of varying magnitudes, for the next parliament. Some of these remain unfunded. Even more tightening would be needed to pay for any unfunded tax cuts, should they be implemented in the three years to 2018-19.

While there are potentially sizeable differences between the parties’ fiscal stances, In the balance suggests that any such difference could easily be overshadowed by relatively small changes in economic growth (and associated tax-revenues) over the next four years.

The difference in government revenues that would arise in a scenario in which growth over each of the next four years was one percentage point above the OBR’s March 2014 projections, compared with a scenario in which revenues grew by one percentage point less than the projections, would amount to around £55 billion – more than enough to wipe out any potential differences between the parties.

With the OBR’s projections likely to be revised at the Autumn Statement – and again at Budget 2015 – the Resolution Foundation emphasises that the precise scale of the fiscal challenge facing the next government remains highly uncertain. However, recent official data showing that the government’s borrowing target for 2014-15 is likely to be off course, largely as a result of weak income tax revenues despite recent rapid employment growth, suggests that the already daunting fiscal challenge facing the next government might get even tougher.

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

“With only half the government’s intended fiscal consolidation due to be completed during the current parliament, the spending choices facing the next government will loom large over the coming election.

“Meeting the fiscal targets set out by the main political parties could mean a redrawing of the boundaries of the state due to swingeing cuts, significant new taxes, or a slower path of deficit reduction and more debt – or a mix of all three. Yet no party has really made clear which it’s going to be.

“Political parties have a point when they say that the uncertainty over the public finances makes it impossible to provide complete detail on their fiscal plans. But the gap between the scale of consolidation implicit in their plans and what the electorate has been told to date is just too large. The electorate shouldn’t be subjected to another largely empty fiscal debate like it was at the last election. Currently we are facing a candour deficit as well as a fiscal one.”

• Labour’s pledge to increase NHS spending by £2.5bn has not been modelled because they claim it will be funded from new tax increases and therefore be fiscally neutral. Similarly, the Liberal Democrats’ NHS funding pledge is excluded.

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Rob Holdsworth (Director of Communications) on 020 3372 2959 or 07921 236 972

Natalie Cox (Communications Officer) on 020 3372 2955 or 07983 550 337