The budget less than a week away will be a Labour budget, but what would a Liberal Democrat budget look like?
Jeremy Hunt’s last budget was expansionary (£13.875 billion) with cuts to national insurance contributions to boost the economy, as was his earlier financial statement (£13.73 billion) which also included cuts to national insurance contributions. These measures to some extent did work with growth of 0.7% January to March and 0.6% April to June. But growth has fallen away with no growth in July and only 0.2% in August. There is therefore a need for an expansionary budget.
A Liberal Democrat Chancellor of the Exchequer should start with reversing the cuts to the Winter Fuel Payment (costing £1.4bn), followed by ending the two-child benefit cap (costing about £3.4bn).
During the General Election we talked about the cost-of-living crisis. Therefore, we should provide financial assistance for pensioners and people on benefits as the Conservative Government had done. The Energy Cap from October is £100 less than last year, so the cost-of-living payments should be set at £200 which would be a one-off cost of about £3bn.
We also talked about the Conservatives putting up taxes for struggling families and pensioners by freezing income tax thresholds. Does this mean that we should expect a Liberal Democrat Chancellor of the Exchequer to unfreeze the income tax and national insurance thresholds by the rate of inflation (costing about £3bn)?
It was reported on Channel 4 News that according to the JRF households on benefits are £690 a year worse off in August this year compared to January 2021. We might expect that a Liberal Democrat Chancellor of the Exchequer would increase Universal Credit and the legacy benefits by £20 a week (costing about £7 billion over a full year), to begin to implement our policy ending deep poverty within a decade, but as it didn’t appear in the Manifesto this is unlikely in the present circumstances. However, a Liberal Democrat Chancellor might well implement our policies on Carer’s Allowance including increasing it by £20 a week (costing £1.45bn).
As the NHS and social care were our priorities, we should expect that a Liberal Democrat Chancellor would increase spending on them in line with our Manifesto Costing document by £8.35 billion a year.
It would also make sense to implement the welfare benefit changes included in this costing document – including ending the Benefit Cap and the Bedroom Tax (which together with the ending the Two-Child Benefit Cap we costed at £4.06bn). However, this still leaves £17.86bn of our proposals for increased government spending not implemented.
It is rumoured that there is a £40 billion hole in the Government’s finances which needs filling. Excluding the changes to the Winter Fuel Allowance, Rachel Reeves has stated she has found £6.645bn toward filling this hole.
Excluding the cost-of-living payments a Liberal Democrat Chancellor of the Exchequer would have an increase in spending of £47.215bn. Jeremy Hunt stimulated the economy this year by £27.605bn, so it should be fine to increase spending by this amount without financing it from increased taxes.
We unfortunately promised that we wouldn’t increase income tax, national insurance contributions or VAT. If this commitment had not been made a Liberal Democrat Chancellor could increase the higher National Insurance rate for employees by two pence (raising £2.9bn) and the basic rate of Income Tax by two pence (raising £12.4bn).
A Liberal Democrat Chancellor of the Exchequer should start with the implementation of all our tax changes set out in our Manifesto Costing document, which includes restoring the bank corporation tax extra levy to 8%, reforming Capital Gains Tax, modifying the windfall tax on oil and gas super-profits, increasing the Digital Service Tax, introducing a 4% tax on share buybacks, and reforming aviation taxes. They should also state that a Liberal Democrat government could find £7.23bn by tackling tax avoidance and evasion. In the costing document we state all of the changes would provide £26.87bn. We also state we could find savings of over £4bn.
However, a Liberal Democrat Chancellor could raise more revenue by reducing pension tax relief to the basic rate of tax (worth around £13 billion in 2021 according to Consultation Paper 146). However, if they accepted that an economic stimulus of £19.345bn is needed, which is less than the one produced last year, then this extra tax increase might not be required.
Turning to spending on investment, a Liberal Democrat Chancellor of the Exchequer should spend an extra £19.7 billion on public investment as set out in our Manifesto Costing document. Most of this would not stimulate the economy until the later part of the next tax year or even 2026/27. This is quite a low level, about 0.867% of the economy. It is even lower than the level we said we would invest in 2019 of about £26bn (nearly 1.2% of GDP).
* Michael Berwick-Gooding is a Liberal Democrat member in Basingstoke and has held various party positions at local, regional and English Party level. He posts comments as Michael BG.
Follow @libdemvoice.org on Bluesky
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Michael Meadowcroft: A Liberal of Intellectual Rigour and Uncommon Integrity
Debt-ridden graduates claim they are seen as cash cows
Why non-fiction books need their indexes
Changes in status: Local Elections wrap up
Tom Bailey
Daniel Walker
Matt (Bristol)
Hywel
16 Comments
Comparing Michael’s fine analysis of what a Liberal Democrat budget could be with what we are being led to expect of the Labour Chancellor’s forthcoming one makes me realise again that the Labour party is not Liberal. There is an obsession with investing for growth and an intention to benefit the working population through top-down measures which the country does apparently need. But there is no mention of trying as soon as possible by reform and increase of taxation to have the means of bettering essential local services, and considering the well-being and sufficient income of the millions of fellow citizens who are struggling with the cost of living and have said as much.
Why not? Is it too local and minor? Our country does need more than ever the Liberal Democrat way of caring about and standing up for ordinary people, whoever they are.
Might an L. D. chancellor re-write the [alleged] fiscal rules thus?
No child living in poverty
Decent homes for all
No hypothermia
Secure and prompt health and welfare systems
Education setups which enable children to become fully literate critical thinkers.
ihttps://www.taxresearch.org.uk/Blog/2024/10/18/the-fiscal-rules-we-need/
Katharine,
Indeed, we shouldn’t expect many of the things I have included in a possible Liberal Democrat budget next week in the first Labour budget for fourteen years. There is little likelihood that our policies on welfare or my suggested cost-of-living payments (above) will be included.
Steve Trevethan,
Thank you for the link to Richard Murphy’s website (https://www.taxresearch.org.uk/Blog/2024/10/18/the-fiscal-rules-we-need/ ) where he wrote, ‘that economics cannot be about money’ and ‘Instead, economics should always be about the allocation of the real economic resources available within the economy’. He also wrote, ‘what I have described as fiscal rules in my tweet are exactly that: they are some of the minimum considerations that should apply to ensure that fair allocation of resources takes place within the economy in which we live’.
I would hope that Liberal Democrats do see these five things as required for a fairer and better UK.
Thank you for posting this Michael. One comment I would make is re the restriction to pension tax relief. As things stand at the moment, no Govt will restrict pension tax relief. There are all the reasons re encouraging individuals to put funds away (v good principle)….but the main reason is that it won’t work.
All an individual needs to do to get higher rate tax relief if higher rate tax relief was abolished would be to reduce their salary by the employees contribution and increase the employers contribution. That way higher rate tax relief has been obtained and restricted pension tax relief would not affect that.
Thanks to Michael B G for his comment and his kindness in providing a working link to Mr Murphy’s article!
The Conservatoves have demonised taxation and those with modest and higher levels of wealth have voted for them as a result. They finall realised that the consequences of that are very poor services in health etc.
We should be trying to change the narrative on Tax and concentrate more on innovation, modernisation and funding in preparation for the climate disaster that has started to affect us all.
If anyone harbours any ambitions of being the Chancellor there is a game on the Financial Times website to practice with.
https://ig.ft.com/chancellor-game/
I don’t have any myself but nevertheless I thought it might be a bit of fun. So far I’ve received numerous warnings about breaking the Fiscal Rules even though I’ve played it fairly cautiously. But I seem to be doing OK overall. I don’t seem to have set off a hyperinflation as yet! Prof Bill Mitchell reported the same thing when he tried it.
I’m really not sure how valid the model is. It could be built with very much a neoliberal model. In which case GIGO as they say.
I’ll have another go with a more expansive fiscal policy later.
PS LibDem MPs might want to ask Rachel Reeves why there is any need for a contractionary budget when inflation is only 1.7% p.a.
@Peter Martin This is a great game, thanks for the tip! Sobering and realistic about the narrowness of the line that the Chancellor presumably has to walk. Naturally it doesn’t allow scope for more ambitious changes to the tax system such as a range of policies that would shift the tax burden from income towards wealth. 40-45% of all UK wealth is bound up in land and property for instance and so initiatives such it’d be great if the game allowed scope for initiatives such as the Land Value Tax to be explored.
David Garlick,
It would have been good if we had changed the narrative on tax, but we didn’t. I think voters would have accepted a message that taxes will need to go up to pay for better public services. We need to try to get people who accept this elected on to our committees next year.
Peter Martin,
Thank you for the link to the FT game. I have played it, but at the end it states ‘The game assumes that growth rates and interest costs are unaffected by policy decisions.’ Also, the policy options are very restricted. I don’t recall seeing any results for inflation once the game is completed.
A long time-a-go on an away-day I played a much better game based on fiscal decisions (over a number of years).
Indeed, an expansionary budget could be presented, especially as unemployment is at 4.4%. Last year Jeremy Hunt (as I wrote in the article) presented an expansionary budget followed by an expansionary autumn statement and on both occasions inflation was higher.
@ John Hills @ Michael BG
You’re both correct about the deficiencies of the FT Chancellor game. It would of course be useful to develop a more realistic computer model of the economy which was available to all. It could be tested by retrospective checking of outcomes against previous fiscal and monetary changes in policy.
I know Steve Keen has developed “Minsky”. It doesn’t look to be that user friendly though.
https://www.profstevekeen.com/wp-content/uploads/2022/03/ModellingWithMinsky202203-1.pdf
Previous to that we had various analogue models such as the Phillips Machine using tanks of water and pumps etc.
https://en.wikipedia.org/wiki/Phillips_Machine
If anyone in a University dept is looking for a worthwhile project……..
“PS LibDem MPs might want to ask Rachel Reeves why there is any need for a contractionary budget when inflation is only 1.7% p.a.” I think she might reply (but won’t) that she isn’t. The previous government introduced but often did not implement a number of inflationary measures. She will be cancelling some but not all of those. On top of that, she will be changing the fiscal rules to allow more borrowing for investment. That means the budget will be expansionary masked by the language of responsibility.
@ Peter Davies,
The time for any new investment spending to have a positive effect will be quite long whereas any spending cuts and tax rises will be have an immediate negative effect on the economy. So, even if you’re right about the budget being expansionary, it will only be in the longer term.
A lot can happen before we get to the longer term.
Rachel Reeves needs growth much sooner. Like, now! But it’s unlikely she’s going to get it by sticking to her fiscal rules – even if she does fudge them.
Peter Martin,
Indeed, it would be good if there was a realistic computer model of the economy which was available to all.
Peter Davies,
The previous government would not call their fiscal measures inflationary; expansionary would be a better word. Increasing investment spending will take more time to effect the economy than day to day spending would, which is why both are required.
If Rachel Reeves increases the rate of employer national insurance this may have a detrimental effect on business expansion and economic growth.
I would hope that a Liberal Democrat’s first budget would go further in starting to reducing the glaring inequalities in our country. The emphasis should be on taxing wealth in all its forms. This would give the electorate a clear indication of our priorities as well as improving our public services, helping the disadvantaged and growing our economy by investing in infrastructure.
Starmer is trying to tell us that “tax rises are needed to prevent austerity”. It doesn’t make any more sense than saying “spending cuts are needed to prevent austerity”.
It’s all austerity -unless perhaps we are talking about wealth taxes but Starmer clearly isn’t interested in them.
Both tax rises and spending cuts could be necessary if we had an overheating economy and demand had to be trimmed. They aren’t necessary to reduce any deficits in the budget. In fact they won’t actually do that. Both will slow down the economy and reduce the Govt’s tax take.
https://www.bbc.co.uk/news/articles/c5y5d87zjxdo
@ Peter Hirst,
” The emphasis should be on taxing wealth in all its forms. ”
Fully agree. Except you have to go a lot further to the left than the Lib Dems to find any party supporting your stance.
Peter Hirst,
Hopefully, you have studied our Manifesto Costing document (https://www.libdems.org.uk/fileadmin/groups/2_Federal_Party/Documents/PolicyPapers/Manifesto_2024/Funding_a_Fair_Deal_-_Liberal_Democrat_Manifesto_Costings_2024.pdf) and what tax changes we would implement in the first year of a Liberal Democrat Government. On pages 11-12 of our Manifesto (https://www.libdems.org.uk/fileadmin/groups/2_Federal_Party/Documents/PolicyPapers/Manifesto_2024/For_a_Fair_Deal_-_Liberal_Democrat_Manifesto_2024.pdf) I would expect us to set out our long-term tax policies, but there are none. In the Pre-Manifesto (https://www.libdems.org.uk/fileadmin/groups/2_Federal_Party/Documents/Conference/Autumn_2023/PP_153_For_a_Fair_Deal_Paper_compressed.pdf page 10)) in a similar paragraph we stated, we would ‘tax income from wealth more similarly to income from work’.