What the IFS says about Lib Dem policies (the good and the less good)

The Institute for Fiscal Studies today delivered its Election Briefing 2010 verdict. We’ve looked at what it says about Lib Dem policies, and publish relevant extracts, below – highlighting both the positive aspects, and those where the IFS says the Lib Dems are lacking.

But if you don’t have time to read even our filleted version, here’s the filleted fillet:

  • In terms of reducing the deficit, the Tories will cut public spending most, Labour least; while Labour will increase taxes most, the Tories least. The Lib Dems are in the middle when it comes both to public spending cuts and tax increases.
  • As it stands Labour will have to find a further £7bn of tax increases in the next five years; the Tories will have to reverse half their announced £6bn tax cuts; while the Lib Dems will not have to go beyond what is already set out in the party’s manifesto.
  • Under either the Lib Dems or Labour public spending cuts in the next five years will have to be the most severe in a generation. Under the Tories the cuts would be the most severe in modern history.
  • No party has set out how it will tackle the deficit in full: the Lib Dems have gone furthest in being open and honest with voters, identifying over 25% of measures needed, ahead of either the Tories (17%) or Labour (13%).
  • The IFS does not believe there is a black hole in the Lib Dems’ tax reforms, and states that they are “progressive”.
  • The Lib Dem proposal to take all those earning under £10,000 out of income tax will be a better work incentive than the Tories’ proposed NI tax cut.
  • Only the Lib Dems have been clear about dedicating a £2.5 billion pupil premium to help pupils poor enough to be eligible for free school meals. The Tories’ pledge is labelled “unclear” by the IFS, while Labour is accused of re-badging existing money.

Here’s the fuller version …

Repairing public finances:

Lib Dems informally endorse Labour on when to withdraw the fiscal stimulus in order to protect the UK economy from a ‘double dip’ recession:

The Labour government’s 2010 Budget set out the size of its planned tightening in each year. It aims to withdraw the temporary fiscal stimulus package this year, start tightening in 2011–12 and finish the job in 2016–17, with the pain front-loaded in the earlier years. The Liberal Democrats have informally endorsed this tightening profile. The Conservatives want to start tightening earlier and proceed more quickly. They plan an additional £6 billion tightening this year and would aim to get almost all the repair job done a year earlier than Labour and the Liberal Democrats in 2015–16.

However, there is little long-term difference in the parties’ plans:

… we project that the Conservative plans would return government debt below 40% of national income in 2031–32, the same year as it would under Labour or the Liberal Democrats.


In terms of reducing the deficit, the Tories will cut public spending most, Labour least; while Labour will increase taxes most, the Tories least. The Lib Dems are in the middle:

Differences between the parties are much more pronounced with regards to the composition of the tightening. Labour favours a 2:1 ratio of spending cuts to tax rises (£47 billion and £24 billion, respectively), the Liberal Democrats a 2½:1 ratio (£51 billion and £20 billion) and the Conservatives a 4:1 ratio (£57 billion and £14 billion). …

On current measurements, Labour will have to announce £7bn of tax increases in the next five years; the Tories will have to reverse £3bn of the £6bn tax cuts they’ve announced; while the Lib Dems are not projected to have to increase taxes any further than the party has already set out in its manifesto. The tax share would rise most steeply under Labour in the next five years; least sharply under the Tories; with the Lib Dems in the middle.

Measured as a share of national income and converting into 2010–11 terms, Labour has already put a £17 billion tax increase into the pipeline for the coming Parliament. We estimate that its goals for borrowing and the overall composition of the fiscal tightening would require it to announce further tax increases worth around £7 billion. The Conservatives have announced a £6 billion net tax cut on top of what is in the pipeline from Labour, but their goals would probably require them to reverse about half of it. The Liberal Democrats have announced a £3 billion tax increase on top of what is in the pipeline and would not need to do anything further. The rise in the tax burden by 2016–17 would be largest under Labour and lowest under the Conservatives, with the Liberal Democrats in the middle. …

If either the Lib Dems or Labour are in government, public spending cuts in the next five years will have to be the most severe in a generation. If the Tories are in government, public spending cuts will be on a scale unprecedented in modern history.

Over the four years starting in April 2011, both Labour and the Liberal Democrats would need to deliver the deepest sustained cut to spending on public services since the four years from April 1976 to March 1980. Starting this year, the Conservative plans imply cuts to spending on public services that have not been delivered over any five-year period since the Second World War.

No party has yet set out anything like enough public spending cuts to meet their objectives of cutting the deficit. The Lib Dems have produced the most detailed measures, totalling over 25% of the cuts needed; the Tories have identified 17%, and Labour just 13%. It’s fair to say, then, that the Lib Dems are being the most honest and open of the three major parties – but that we have a long, long way to go.

Once we take into account their various pledges to protect spending in certain areas, in real terms the Conservatives would need to cut public services spending in their unprotected areas by £63.7 billion, Labour by £50.8 billion and the Liberal Democrats by £46.5 billion between April 2011 and March 2015. Of these, the Conservatives have announced measures that would bring about 17.7% of the total cuts they need, leaving a shortfall of £52.4 billion. Labour has announced measures that would bring about 13.1% of what it would need, leaving a shortfall of £44.1 billion. The Liberal Democrats have announced measures that would bring about 25.9% of what they would need, leaving a shortfall of £34.5 billion.

Taxes and benefits:

The IFS say that it is almost impossible to be sure that the Lib Dems revenue raising measures will raise exacty what the party estimates – but crucially the IFS says this is not a sleight of hand: some may raise more then we project, others less. Overall (Will Straw and Fabians please note), the party’s proposal are pronounced ‘progressive’ by the IFS.

There is greater uncertainty around the net fiscal impact of the Liberal Democrat proposals than those of the other parties. We can be pretty confident that the Liberal Democrats’ headline giveaway (increasing the income tax personal tax allowance to £10,000) will probably cost roughly what they expect. There is much more uncertainty around the estimates for their revenue raising measures, but no clear overall bias: some look likely to raise more than they expect and some less. … The Liberal Democrats would make the [net] ‘takeaway’ more progressive, redistributing resources from the wealthy to middle-income households (though not the poorest households).

Moreover, the Lib Dem measures would be far more effective than the Tories’ NI cut in incentivising those out of work to be in paid work, or those earning below £10,000 to earn more.

The Liberal Democrats’ proposed income tax cut would probably strengthen the incentive to be in paid work for more people than the Tory NI cut (thus increasing employment more), as well as increasing the incentive for those earning less than £10,000 to earn more. But they would do more than the other two parties to weaken incentives to work and save among richer households.

The Lib Dems’ tax reforms are the most radical of the three main parties, and most earn the IFS thumbs-up. The exception is restricting tax-relief on pensions.

The Liberal Democrats are proposing the most radical and far-reaching set of tax reforms of the three parties. Several of them would reduce or remove features that distort people’s behaviour in damaging ways, for example equalising tax rates between income and (some) capital gains, between property repairs and new build, and between benefits-in-kind and other remuneration. Replacing air passenger duty with a per-plane tax also looks sensible on environmental grounds. The glaring exception is their proposal to restrict tax relief on pension contributions for many more people than planned by the Government.

On devolution

The Lib Dems are the party most committed to cascading power to the lowest level possible.

… the Liberal Democrats would give greater powers to Edinburgh by implementing all of the Calman Commission’s proposals, and give local authorities control over a far greater share of their revenues.

Benefit and tax credit reform:

Lib Dem proposals to fix tax credit awards for six-month periods are “sensible”, says the IFS.

The Liberal Democrats propose to fix tax credit awards for six-month periods. This should make it considerably easier for families to work out what their entitlements would be if their circumstances changed (e.g. they moved into work). The disadvantage is that entitlements would be based on past circumstances, not current ones. This is an inescapable trade-off, but IFS researchers have previously argued that fixing tax credit payments for periods of time would be a sensible reform, all things considered.

Education


Lib Dems are committed to expanding early years provision but have not specified how.

England’s early years spending includes free part-time nursery care for three and four year olds, and the Sure Start programme, providing health and education information to parents with children under five. … the Liberal Democrats have expressed a long-term ambition to increase the hours of provision funded by the government, and extend the age range at which it is available. They have not, however, stated when they would seek to implement this extension.

Only the Lib Dems have been open and honest about how they will target more money to assist children in the most deprived areas through the party’s ‘pupil premium’. Labour would just re-badge existing funding, the Tories’ proposals are “unclear”.

All three main parties would introduce a pupil premium into the school funding system in England. The Liberal Democrats have been quite clear about their proposal for a £2.5 billion pupil premium largely targeted at pupils poor enough to be eligible for free school meals, which would be on top of all existing funding. Labour has proposed a ‘local pupil premium’, which may simply involve a re-badging of existing deprivation funding. It is unclear what the Conservatives’ proposals for a pupil premium would mean in practice, and it is thus impossible to quantify its likely impact on individual schools’ funding or overall levels of public spending.

The minimum wage:

The Lib Dem commitment to equalising the minimum wage for all young people aged 16-21 might result in more young people opting out of education earlier, while also increasing the likelihood of youth unemployment for 16-20 year-olds.

The Liberal Democrats propose to equalise the minimum wage for all workers aged 16 and over (currently, there is a lower rate for 16- and 17-year-olds, a middle rate for 18- to 21-year-olds and a higher rate for those aged 22 and over). Although the Low Pay Commission has recommended that 21-year-olds be paid the adult rate, it has recommended that the lower rates for those aged 16–20 remain. A higher minimum wage for these young people might reduce the fraction in full-time education, but also lead to employers offering fewer jobs to these people if they have to pay the same as they pay to those aged 22 and over.

Work and training

Consensus between the three main parties on tackling youth and long-term unemployment.

Sensibly, there is general agreement between the three main parties on the need to tackle the large rise in youth and long-term unemployment caused by the recession. All three main parties plan to target unemployed people under the age of 25. The Liberal Democrats would introduce voluntary work placements solely for this group for one year.

Disabled people and incapacity benefits

The Lib Dems have proposals but lack detail on this area.

The Liberal Democrats do not comment on this area in their manifesto. But they propose better ‘practical help’ for people with disabilities to get to work, and funding of disability-related equipment to be ‘already in place’ when disabled people apply for a job (it is currently available only when a job has already been offered or started). Without more detail, it is impossible to assess the likely impact of this.

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9 Comments

  • Anthony Aloysius St 27th Apr '10 - 8:36pm

    “… the Conservatives have announced measures that would bring about 17.7% of the total cuts they need, leaving a shortfall of £52.4 billion. Labour has announced measures that would bring about 13.1% of what it would need, leaving a shortfall of £44.1 billion. The Liberal Democrats have announced measures that would bring about 25.9% of what they would need, leaving a shortfall of £34.5 billion.”

    In other words, all three parties are planning huge cuts in public spending, but are not saying where the bulk of the cuts will be made, because they are afraid of losing votes.

    Because of this weakness in the positions of all of the parties, they are all unwilling to raise the issue, and so the most important political issue at stake is scarcely being discussed at all.

  • Even in isolation, raising the personal allowance is the most progressive (or least regressive) direct tax cut available to any Chancellor. I attended the IFS briefing today and I checked this contention with the IFS deputy director Carl Emmerson, and he confirmed it.

    It is what the IFS always used to say when opposing the starting rate bands (of 20p and 10p respectively) introduced by Norman Lamont and Gordon Brown, which they rightly argued complicated the system and were not the best way of achieving their stated purpose of helping the low-paid.

    What their charts show is that the £10K personal allowance policy is of most benefit to middle, rather than lower, income households. The reason for this is simply that families with two taxpayers will gain more (potentially £1,410 rather than £705) and two-earner households tend to be better off than families with a single taxpayer.

    So when looked at on a household basis, it’s true to say the highest gains are in the middle or upper-middle part of the income distribution (deciles 6 to 8, where household income is maybe £30K to £50K). And there’s nothing wrong with that; indeed the party has always said it aimed to cut taxes for low *and middle* earners, and this policy squarely does that.

    But if you look at it on an individual basis – how the policy affects single people – then the cash gains are a uniform £705 for everyone earning between £10K and £100K (after which the personal allowance is withdrawn). This means that in percentage terms the gains are highest for those earning just above £10K – ie the low-paid – and get steadily smaller as you move up the income distribution. Looked at in this way the policy is much more progressive. As the IFS acknowledge in their report, “clearly £705 would be less valuable to those on higher incomes than to those on lower incomes”.

    The reality is that if you are going to help the low-paid through the tax system, this is one of the best ways of doing it, even though gains accrue further up the income scale. The reason it doesn’t help the poorest is that the poorest don’t pay income tax; by definition, a tax cut can only help those who pay taxes.

    Nonetheless, income tax cuts in at an absurdly low level in the UK (less than two-thirds of full-time minimum wage earnings), so there are plenty of low-paid people who pay it and would benefit from this policy.

    No other changes to income tax or NI (other than raising the NI starting threshold, which would also be desirable for the same reasons) would be more progressive. Certainly not Brown’s notorious final budget in 2007, which by cutting the basic rate by 2p and simultaneously abolishing the 10p rate deliberately directed the most money from the low-paid to single earners on around £40K. So the Lib Dems should take absolutely no lectures from Labour on this. Even Brown’s 10p rate was of minimal benefit to low earners (and indeed anybody) compared with the £10K personal allowance policy.

    If you want the most progressive tax cuts you really need to look at cutting indirect taxes like excise duties or fuel duty (although I think this bears most heavily on middle income people).

    Of course tax credits can be an alternative way of targeting financial support at the poor, but they also create a means-testing quagmire, unavoidable disincentive effects as they are withdrawn and – under the fiendishly complex system Brown has designed – administrative chaos leading to over-payments, clawbacks and the like.

    The reason the Lib Dems are keen on raising the tax threshold instead is partly a philosophical one: unlike Labour, we believe it is better for people to keep more of their hard-earned money rather than having it taxed and then applying to claim some of it back. The fact that in the process we help middle and even middle/high earners is a feature not a bug.

    As the IFS have acknowledged, it is also one of the best ways to improve work incentives, since it reduces the marginal tax rate for those in the £6,500-£10,000 bracket by 20p, making each additional hour or day of work much more worthwhile, and substantially widening the gap between benefits and paid work.

    I have my doubts about our advocacy of the £10K allowance policy at this election, but they relate to how affordable it is in a context where we have a £75bn structural deficit and should be using most additional revenue to reduce the deficit. The policy itself is a good one, and we should definitely move in this direction.

  • Malcolm Todd 27th Apr '10 - 11:33pm

    I hadn’t noticed that we planned to do away with the lower minimum wage rate for school leavers. This seems profoundly unwise to me. For most employers, being relatively cheap is the main attraction of generally unproved, untrained young people. If they have to pay an adult rate, they’re more likely to choose to pay an adult — and another generation will fail to get into work at exactly the age when they need to acquire the habit.

  • Paul McKeown 28th Apr '10 - 12:07am

    I like your filleted fillet: surely useful material for Nick Clegg whilst preparing for Thursday evening.

  • Regardless of increases in personal tax allowances, before we start planning on how to spend £700 each, remember two things. Firstly, this is likely to be phased in over 5 years, starting from 2011 so dont expect more than £200 extra in your before 2012 (like saving £1-2 per week!) Secondly, beware a shifting of tax thresholds between 20% and 40% – if this is lowered slightly most middle earners are likely to have all benefit taken back away!

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