Jessica Fino 26 May 2017 11:04am

Tories and Labour not being honest with the public, says IFS

The Institute for Fiscal Studies (IFS) has warned that Britain is facing five more years of austerity under Theresa May’s plans and has said that Labour’s policies “would not work”

In its manifesto analysis published on Friday, the IFS said neither the Conservatives nor Labour have properly spelled out the consequences of their policy proposals in their manifestos.

It warned that the Conservative Party’s intentions to go ahead with planned welfare cuts and the serious pressures on the public services including on the NHS would imply “at least another five years of austerity”.

The think tank explained that in order to achieve a balanced budget by the mid-2020s, it would likely require more spending cuts or tax rises even beyond the end of the next parliament.

Paul Johnson, IFS director, said, “In one sense the two main parties have rarely offered the British such a clear and substantial choice. One is promising relatively low levels of spending, tax and borrowing, while the other is promising a much bigger state.

“But neither is being really honest with the public. It is likely that the Conservatives would either have to resort to tax or borrowing increases to bail out public services under increasing pressure, or would risk presiding over a decline in the quality of some of those services, including the NHS.”

Under the Conservatives' plans, the deficit could still be around 1% of national income by 2021–22, or around £21bn, leading potentially to a fourth parliament of austerity after that.

Meanwhile, Labour’s proposals would raise spending to its highest level since the mid-1980s and tax to record levels during peacetime.

Labour has said it would increase capital spending dramatically and would accept a much bigger budget deficit than the Conservatives would.

It is also proposing very big increases in tax, a bigger increase in spending and, as a result, borrowing continuing around its current share of national income.

However, the think tank warned Labour's proposed plan for paying for this expansion in state activity would not work.

It said, “They would not raise as much money as they claim even in the short run, let alone the long run. And there is no way that tens of billions of pounds of tax rises would affect only a small group at the very top as their rhetoric suggests.

“If they want the advantages of a bigger state they should be willing to candidly set out the consequences – higher taxation affecting broad segments of the population.”

According to the think tank’s calculations, Labour would be able to raise at most £40bn per year in the short term in taxes from the richest taxpayers and less in the long run, instead of the planned £49bn.

Labour’s tax rises would also translate in lower wages, higher prices, or lower investment returns including those accrued within private pensions.

IFS director Johnson said, “Labour’s commitment to a much bigger public sector would require higher taxes that affect many of us.

"A bigger state than the one we have been used to is perfectly feasible as many countries have demonstrated, but Labour should not pretend that such a step-change could be funded entirely by a small minority at the very top. In particular the large increase in company taxation that they propose would undoubtedly affect a far broader group than that.”

Meanwhile the Conservatives, the IFS said, have few tax proposals in their manifesto, but their promise to raise the income tax personal allowance to £12,500 would leave about 24 million basic rate payers £33 a year better off.

On public service spending, the Conservatives’ plans for NHS spending look “very tight indeed and may well be undeliverable”.

A real increase of £8bn over the next five years would extend the lowest period of spending increases in NHS history to 12 years.

The IFS said that Labour’s biggest spending commitment is the abolition of student loans, which would cost “well over £9bn a year” in the longer term and would benefit high earning graduates the most.

But Conservative plans for a continued cap on public sector pay would be hard to deliver, it suggested.

Theresa May’s plans on immigration would hit both the economy and the public finances, hitting tax revenues by £6bn a year.

Carl Emmerson, IFS deputy director, said that “denying entry to young, working immigrants” would make the public finance challenge, led by spending pressures on health, pensions and social care, harder to meet.

“But so would continuing with the triple lock on the state pension, as Labour proposes, or the similar double lock, as the Conservatives propose,” he added.

Speaking at Church House in Westminster on Friday, Emmerson said. “The shame of the two big parties’ manifestos is that neither sets out an honest set of choices”.

He said that neither party has addressed the long-term challenges the country faces.

In summary, the Labour manifesto faces two big risks, he explained. The first is that they risk failing to raise the tax revenues they want from their proposed measures. The second is that some of the proposed tax increases, alongside the very big increase in the minimum wage, and other labour market regulation, would turn out to be economically damaging.

For the Conservatives the big risk is that, after seven years of austerity, they would not be able to deliver the promised spending cuts either at all or at least without serious damage to the quality of public services. Their tight immigration targets would also damage the economy and the tax base.