The forgotten deficit – huge uncertainty over parties’ fiscal plans just four weeks from polling day 11 May 2017 Huge uncertainties about the main parties’ fiscal stances, just four weeks from polling day, mean that there could be as little as £7bn difference between them – or well over £50bn. This is according to a new report published today (Thursday) by the Resolution Foundation. The Deficit the Election Forgot notes how the deficit has largely disappeared from the current election debate, in stark contrast to dominating the last two general elections. It says this likely reflects the fact that the deficit has fallen to a level comparable to that before the financial crisis, voter fatigue with the issue, and the dominance of Brexit over all other issues. However, the Foundation says that the deficit still matters as it will frame the policies next government delivers, drive big long term differences in the UK’s stock of debt and shape how the country approaches its looming demographic challenge. While we know the Conservatives plan to continue the process of fiscal consolidation through the next Parliament, the report shows that differing interpretations of the Conservative Party’s fiscal objectives could be as wide as £47bn apart by the end of the next parliament. Following the party’s ‘fiscal mandate’ – to reduce cyclically adjusted borrowing to below 2 per cent of borrowing by 2020-21 – could allow for £30bn of fiscal loosening by the end of the next parliament, relative to existing plans. On the other hand, the party’s ‘fiscal objective’ – an overall budget surplus in the ‘next parliament’ – which would now need to be achieved by 2021-22 – implies additional fiscal tightening of £17bn. Pursuing such a course would either require significant tax rises or increasing the pace of spending cuts over the next parliament. The report shows that the Labour Party’s ‘fiscal credibility rule’ of a current budget balance in five years would allow for up to £37bn of fiscal loosening on the current budget by 2021-22. The Foundation notes that the Labour Party has not said how much of this headroom they intend to use up. However, it would provide more than enough to reverse spending cuts announced by the current government that are yet to be implemented, including unallocated departmental spending cuts worth £3.5bn and welfare cuts totalling £8bn. The report shows that such an approach would result in a slower reduction in the stock of debt relative to GDP than current projections, especially if combined with yet to be determined levels of additional borrowing for investment spending. The Resolution Foundation says that the lack of clarity over the parties’ fiscal plans matters for three key reasons: Delivery of policy. The next government’s fiscal stance provides the backdrop to policy decisions with big implications for living standards and public services. For example it will determine the scope for reversing – or accelerating – the consolidation that is due to be rolled out over the next four years, including welfare cuts could lead to the biggest rise in income inequality since the 1980s. Debt. While borrowing as a share of GDP at 2.6% is approaching its pre-crisis level (while remaining above the long term average of 1.8%), debt as a share of GDP is almost 90% – well above its pre-crisis average of 35.8%. While claims about the impact of such debt levels on growth are flawed, there is a debate to be had about desirable level of debt that the election looks set to ignore, but which is likely to drive the future of fiscal policy for decades to come. Demographic challenges. An ageing and changing society is set to create significant public finances pressures over the next decade that the next government will have to respond to. The OBR estimates that it will increase health, care and state pension spending by 1 per cent of GDP between 2021-22 and 2025-26, based on current plans. The Foundation says that further clarity is desirable from all parties in their manifestos on both their overall fiscal stance, and how they intend to deliver it through their tax and spending priorities. The experience of recent years is that while the fiscal plans set out at elections are almost certain to be blown off course in one direction or another, they still make a real difference to the policies pursued. It adds that while the current economic uncertainty surrounding Brexit means the next government will need to be flexible in its approach to the deficit, this is no excuse for leaving voters in the dark on its overall plan and priorities. Torsten Bell, Director of the Resolution Foundation, said: “Having dominated the last two elections, the issue of the deficit has now fallen off the radar. That might not be a source of regret for voters suffering from fiscal fatigue, especially as the level of the deficit is such that it no longer looms as large as it once did. “But it remains a very important issue, determining the policies the next government will pursue from public services to tax, the debt level we leave to the future, and the way in which we respond to the big issues of our time – from Brexit to an ageing society. It’s time to pay some attention to the deficit this election forgot.” Matt Whittaker, Chief Economist at the Resolution Foundation, said: “Labour and the Conservatives went into the 2015 election with fiscal plans that were £30bn apart. Two years on, the uncertainty surrounding their plans means that gap could have narrowed to just £7bn, or widened to over £50bn. This scale of uncertainty is unacceptable – voters deserve more clarity than they’re currently getting from the main political parties. “With just four weeks to the general election, the forgotten deficit should reappear in the parties’ manifestos next week.”
