How should we share the gain and the pain in the next Parliament?

resolutionfoundationThat was the question the Resolution Foundation posed at a Lib Dem conference fringe meeting in Glasgow last week. Some of what follows was inspired by (ie, copied from) IFS Director Paul Johnson’s excellent LibDemVoice article, Balancing the books: some unpalatable choices, published last week. Some of it I’ve previously rehearsed in my ConservativeHome column, Make no mistake, these are deep and meaningful cuts – and there’s more to come. Anyway, here’s what I said…

“The gain and the pain.” I want to congratulate the Resolution Foundation on taking a glass half-full approach to the next five years. But I also want to challenge the premise of the question. Because – and I don’t want to be too depressing in what follows – I can see quite a lot of pain and I’m at a bit of a loss to see where the gain is likely to come from. Here’s why.

Five years ago, the deficit (that is, the amount the Government spends in a year minus the amount it raises) reached £157 billion as a result of the deepest recession in a century. The deficit’s currently hovering at around £100bn. The Office of Budget Responsibility reckons some £70 billion of that deficit is structural (rather than cyclical) which means £70 billion of tax increases or spending cuts over the course of the next Parliament are needed if the next Government is going to balance the books.

Now the Lib Dems are, I’m glad to say, doing the sensible thing. We’ve abandoned Plan A. Well, actually we abandoned it a couple of years ago when the economy spluttered to a halt. But now we’ve officially abandoned it. We’ve gone back to the future and reincarnated Gordon Brown’s golden rule – which means that under Lib Dem plans we’d eliminate the current structural deficit but give ourselves the freedom to borrow to invest. That gives us a lot more wiggle room than the Tories.

By the way, the Tories have also abandoned Plan A: they don’t now only want to eliminate the deficit, they also want to generate a surplus. They also want to cut everyone’s taxes and protect spending on the NHS. I want to live in this Tory world where simply saying something can make it so. The reality is that – as the IFS has stated – these Tory plans would mean spending on public services would by the end of the next Parliament be at its lowest level since World War 2 as a proportion of national income. Utterly, utterly fantastical – but that’s not to say the voters won’t like it. After years of grim austerity maybe enough people will be up for some make-believe.

But back to our Lib Dem wiggle room. It’s good we have it. It means less pain. But not no pain – there will still need to be cuts to public spending of around 2.4%. Doesn’t sound huge in the scheme of things compared to what’s come brefore, but don’t forget we’ve also got pay for our spending commitments too. Here’s a couple of questions then about the Lib Dem approach…

Tax-cuts: One way in which the pain has been alleviated over the past four years is the party’s flagship policy, now the Tories’ flagship policy, to raise the personal allowance. We’re committed to going further, raising it to £12.5k in line with the minimum wage. Part of me cheers: it’s an excellent aim. Part of me groans: around 70% of the benefit is felt by the better-off half of tax-payers, not the lowest-paid. Question: wouldn’t it be better first to raise the level at which workers start to pay national insurance contributions, currently just under £8k?

Young v Old – intergenerational justice: One group which has definitely gained over the last five years and will continue to gain are the retired. Spending on the state pension – as a result of the triple lock – will have increased by nearly 20% in real terms between 2010–11 and 2017–18. That’s even more expensive when you consider there will be two million more pensioners at the end of this decade than the start. The impact of the current cuts is to redistribute on a large scale to pensioners from some of the most vulnerable young people who rely on benefits. Is that right?

Transparency: To quote the IFS again: “None of the parties has so far identified more than a fraction of the measures they would use to hit their deficit targets.” In fact when I read that it gave me a sense of deja vu. In April 2010, the IFS published its Election Briefing, highlighting that no party had yet set out anything like enough public spending cuts to meet their objectives of cutting the deficit. The Lib Dems had produced the most detailed measures, yet these totalled only 25 per cent of the cuts needed; the Tories had identified 17 per cent, and Labour just 13 per cent. The finding attracted little scrutiny, with the media fixated instead on the personality-fest of the televised leaders’ debates. Shouldn’t all the parties – including ours – level with the public about what awaits?

Because there aren’t many options available. The reality is that after 2015 one of four things will have to happen. Either (1) big, additional cuts to spending on public services; (2) big cuts to social security; (3) delaying deficit reduction to postpone the problem; or (4) raising taxes – and not just on the rich because there simply aren’t enough of them.

Most likely it’ll be a pick ‘n mix of all four. I think we should level with the voters about what that means. But which party’s prepared to go first?

I was interested (and heartened) that my point we should be focusing any tax-cuts first on national insurance contributions (not further raising the personal allowance) got a spontaneous round of applause from the audience. The party has adjusted its tax-cutting position to include NICs, but only once the income tax threshold is raised to £12.5k (itself an expensive pledge). We should reverse that priority.

I am aware, though, it’s easy for me – unelected, not standing for election – to pontificate that “we should level with the voters”. To give Nick Clegg his due, he did just that in his conference media interviews. Cue newspaper headlines such as “Clegg will send taxes soaring should Lib Dems be elected”. Compare that with the eulogistic coverage Cameron’s fantasy finance tax-cuts attracted and it’s hard to see where the incentive is for politicians looking to get elected actually to level with the voters.

* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.

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7 Comments

  • Totally agree with you that the £12.5k personal allowance threshold is misguided, and that we should switch to increasing NI thresholds.

    On advertising spending cuts in full, parties of Opposition don’t have the same civil service resource for costing proposals, so they’re at a disadvantage. And each party is trusted so little at the moment that they wouldn’t be believed anyway, but pilloried by the losers in their proposals. Perhaps if we want to move in this area, we should start by allowing the Office of Budget Responsibility to cost manifestos, as Labour have asked?

  • Gwynfor Tyley 16th Oct '14 - 11:56am

    The option of raising taxes on the rich is easily dismissed as supposedly there are “not enough of them”. However, the UK government still raises a lower % of GDP through tax than any of the other major EU economies. Targeting tax rises on the masses apart from being unfair would be counterproductive as it will reduce consumer spending. Targeting tax rises on the wealthy is deemed unfeasible as increasing them to French levels is clearly seen to be counterproductive as capital and income flow offshore. Likewise for increasing taxes on corporates.

    I have not seen anyone though proposing greater coordination across Europe to address this problem of capital flight and we see no proposals on what to do about closing down tax havens. If these can be addressed then it opens up the prospect of increasing the tax yield from both corporates and the ‘super rich’. When one looks at the level of wealth owned by the top 1% (c£1.4 trillion), it really would require a very small tax on their wealth to close the deficit.

  • Stephen Campbell 16th Oct '14 - 1:51pm

    Well, we obviously cannot tax the rich more. After all, they love their country (which allowed them to become a success) so much that they’ll just move their money and assets offshore, use complex tax schemes unavailable to the “little people” and continue to use their lobbyists to convince the government not to hurt them, the poor dears. They are, essentially, using their wealth to hold the country and its people to ransom. These people have no allegiance to any nation, their loyalty lies only in their wealth and acquiring more of it just for the sake of it. But according to the Tories (and some of the right of the Lib Dems), this is just “good business sense” and we can’t tax them because they’ll “go somewhere else”.

    So obviously the cuts are going to have to hit the poor, public sector workers and those who already have very little. As usual. And when people protest or go on strike to defend what little they have left, protests will be broken up by the police and stronger anti-union laws will be brought in if the Tories are in power (and if it’s a coalition with the Lib Dems, I’m sure plenty of your MPs will vote in favour of this as well). Because that’s how things work in the UK where, it increasingly seems, the only people the government ever listens to (or cares about) are the rich and multinationals.

  • Gwynfor Tyley 16th Oct ’14 – 11:56am

    You make a lot of very good points in one comment.

    Taxing the very rich should not be too difficult. After all there is only one Duke of Westminster and he is not difficult to find. He is one on the wealthiest people in the country and he is rich because one of his distant ancestors was a chum of Wiliam the Conquerer. So for a thousand years his family have enjoyed this fabulous wealth by accident of birth. Is it not time the Duke started to share a bit of that pain to help to pay off the defecit?

    The current generations of the so-called Windsor family, one of whom will inherit the position of Head of State, not by merit but by accident of birth. It would be nice if they shared a bit of the pain.
    We would all like to buy our grandson an £8 million pound helicopter for his birthday, but it’s difficult to believe that “we are all in this together” when one old lady can afford to do so without thinking, whilst the rest of us look on in astonishment at such vast personal wealth.

    Of course many of the rich and super-rich pay no taxes at all. The British Government is up to its neck in facilitating so-called TAX HAVENS. The Channel Islands, The Cayman Islands, Gibraltar,The Turks and Caicos etc etc. What do they all have in common? They are all part of the well ordered hypocrisy that is the British ruling class who demand taxes from the rest of us whilst ensuring that they themselves do not pay a penny.

    The Queen is Queen of all these places, British troops would be expected to lose their lives to defend these places and those same soldiers would be paying tax for the privilege of doing so –whilst the beneficiaries of the crooked dealing that goes on in these places will get off without paying a penny in tax.
    This is done, not just with the connivance of the UK government, but as an advertised feature of UK government policy which they use to attract criminal oligarchs from Russia and a host of foreign kleptocrats.
    Will they be sharing any of this pain?

  • paul barker 16th Oct '14 - 3:21pm

    All reasonable points if we had already fought the Election & were negotiating a new Coalition. We can begin to be totally honest with the Voters either A, when all the other Parties agree to do the same or B, the Voters start being honest with themselves. I cant imagine I will live to see such times.
    More generally there are lots of good things coming up in the next Parliament, a return to Economic growth, probably; low unemployment & thus, rising wages & hopefully, Reforms to our Politics. If we had to get ourselves in this mess, the next decade is at least a relatively benign period to sort it in.

  • David Evershed 16th Oct '14 - 7:27pm

    All the political parties are afraid to tell the voters about the consequences of globalisation and the impact on government finances.

    Improved communications across the World mean that there is competition from China, India, Brazil and so on to provide the goods and services that businesses and consumers seek. If companies in the ‘developed countries’ want to succeed in competition with the companies in the fast developing countries, then they can not afford to pay their employees multiple times higher salaries unless productivity is multiple times higher (which mostly it isn’t).

    For example, computer programmers in India are capable of writing as good code as computer programmers in this country. Expect the salaries of Indian computer programmers to converge with the salaries of Uk computer programmers. This means Uk salaries will be constrained or fall until Indian salaries catch up.

    Because of such global competition, UK incomes in the private sector are not going to be rising any time soon and the UK tax take will therefore not be rising, despite increased economic activity and employment.

    The obvious solution is to outsource public sector work to India so that government spending declines in line with the decline in tax take. Alternatively public sector salaries can be constrained in the way global competition is constraining private sector salaries.

    Politicians should be explaining to the public that apart from a few exceptionally talented individuals, they can expect their standard of living to fall while the standard of living of the greater numbers of people in much poorer countries will rise. It’s all for the greater good and should be welcomed by those with genuine sociaist leanings.

  • paul barker 16th Oct ’14 – 3:21pm
    “… We can begin to be totally honest with the Voters either A, when all the other Parties agree to do the same …”

    Cynical, illiberal and shocking. How corrupt has our system become?

    Why not be totally honest and in that way win back the trust of those voters who responded positively to the message of an increase in income tax to pay for improved education?

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