How Labour and Coalition deficit reduction plans match up


10:40 am - September 8th 2010

by Duncan Weldon    


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The table below, which I’ve been playing around with, might be helpful to people when thinking about deficit reduction.

It summarises the tax rises and spending cuts planned by Osborne, planned by Darling and what would happen if Labour adopted a 50/50 tax and spending programme, but stuck to a 4 year timetable.

We can see that under the “Darling Plan”, Labour would be able to oppose £9bn of spending cuts in 2011/12, rising to £31bn by the end of the Parliament.

In other words, sticking to the 4 year plan doesn’t mean accepting all the cuts.

Going for a 50/50 split would mean being able to oppose £10.5bn next year, rising to £46.5bn by 2014/15 – although Labour would have to spell out £7.5bn of tax rises in 2014/15 (or £20bn, if they planned to reverse the VAT hike too).

One interesting thing that leaps out is how Osborne is rasing more in taxes in every year than Darling planned (he raises less as a proportion of his tightening, but total tightening is much larger).

And whilst we are on four year plans, it’s worth noting what Liam Bryne had to say recently:

Labour had a much more flexible approach; we legislated to halve the deficit over 4 years, but it was possible to bring in orders for a change if the economy started heading south. George Osborne’s fiscal mandate appears to have no such escape hatch.

Labour didn’t talk much about the “escape hatch” during the general election campaign, but if Ed Balls is right on the coming economic hurricane , and I think he might be (so does Martin Wolf), then this might becme crucial.

We can stick to the four year timetable and have a crediable plan to halve the deficit, one that still allows us to oppose a cumulative £86.2bn of spending cuts whilst emphasing that we are flexible and realistic.

The pace of tightening will be dictated by the pace of recovery.

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments


1. Mike Killingworth

Sorry, but that’s still £130bn of cuts by Labour over the period in question. Or 60% of the Tory figure. At the end of it the 1945 settlement is abolished, either way.

And if the 1945 settlement is indefensible, the Labour Party is absurd. The Golden Rule says that who has the gold makes the rules: capitalism has smashed the working class by outsourcing manufacturing to Asian dictatorships. How much did the woman who made my computer mouse get paid? 50p/hour? How often does her boss rape her?

Politics in the 21st century will be about competing right-wing parties, organised around race and religion. God help us all.

for the love of God Mike, do try to maintain some attachment to the real world. What do you think this graph is going to look like in 2015, after the Tories have done their worst?

How on earth is the 1945 settlement abolished when public spending / GDP ends up at (drum roll) in 2015-16 at 40% of GDP – the (ex crisis) average of the past 20 years.

On that basis Labour abolished the 1945 settlement in 1997 since public spending was below 40% during its first term.

4. Mike Killingworth

[2][3] I don’t need advice on attachment to the real world from people who think the 1945 settlement is about public spending as a proportion of GDP. Public spending can be about lots of other things – notably, on the historical record, funding warfare.

The only thing that I can see differentiating Labour from the Tories in the coming decades is that it will be funded by trade union donations and rich brown men (and lady novelists) instead of rich white City types.

Cjcjc is just one of our tame right wingers but I’d be interested to know what Luis thinks a future Labour government might do for us that no other government would.

“2][3] I don’t need advice on attachment to the real world from people who think the 1945 settlement is about public spending as a proportion of GDP.”

Though strangely your first paragraph @1 implied that it was.

6. Mike Killingworth

Oh well if you can’t tell the difference between a necessary and a sufficient condition I can’t help you.

So public spending well above 40% of GDP is a necessary condition for maintenance of the 1945 settlement, is it?

Well, since it has only infrequently been at that level it can’t be.

Mike,

mea culpa. I was using high govt spending / GDP as proxy for “the 1945 settlement” but perhaps that’s not valid. I dunno.

(I have a list of things I’d like a left wing government to do (and not do) and a reasonable hope that a future Labour government would at least get closer to that than the Tories. Basic stuff like, at the most simplistic level, taking from the rich to help the poor).

As I understand it the trade offs here are relatively simple in words – but very hard to pin down in figures.

1 – trade off between higher taxes and cutting spending
2 – trade off between paying down debt quickly or taking longer but having more eaten away by economic growth
3 (not unrelated to 2) trade off between starting quickly but risking growth or starting later but having more to pay off.

The key differences between labour’s plan and tory plans are 2 and 3 – labour wanted to start later and pay down slowly but with growth thus reducing the over all need for cuts. The Tories want to start sooner and pay down quicker and and accept growth will be reduced as a result. (not publicly accept, but they are not morons and do know this in private)

The 50-50 plan is a different kind of trade off – and Labour were never specific about how much would come from tax rises over the period. But it seems a credible option to build in.

That said – it means comparing like for like is not practical as the key strength of an alternative would be to take longer and thus secure greater growth which would in turn reduce the need for such severe cuts and tax hikes.

10. Mike Killingworth

[8] Fair enough. Where we disagree is that I don’t think that your hope that a future Labour government will do any left-wing things is reasonable! 😆

Going back to the OP, there is one important omission in the construction of the tables. That is the impact of inflation. An appropriate inflation policy (and the government is presently running just such a policy* – this is an area where all the parties agree) is probably the single most powerful debt reduction agency available to the State.

*That is to say, ensuring that both wage settlements and returns to savings are 1-2.5% below an inflation rate of about 4%

A few points on this:

(1) Darling’s plan was based on a projected deficit for 2009/2010 of £167 billion. As it turns out, the deficit was £155 billion. So the total value of spending cuts and tax rises required to bring the deficit down to his 2015 target level is £12 billion lower than he thought – £61 billion rather than £73 billion, or £30.5 billion each of tax rises and spending cuts on a 50:50 split. So I think Labour could in fact credibly oppose a further £6 billion of cuts by 2015 than this table suggests, while calling for £6 billion less in tax rises.

(2) Labour should be arguing loudly and clearly that without the Coalition’s excessive cuts, economic growth would be making a bigger contribution to reducing the deficit. So they should be clear that opposing £46.5 billion of spending cuts doesn’t mean defending £46.5 billion of borrowing.

(3) On VAT: I can’t find the figures now, but I’m sure the tax cuts announced in the Budget (e.g. corporation tax, the threshold rise) were worth close to the £13.5 billion the VAT hike was worth; so if Labour wanted to oppose the VAT rise, they could simply call for the reversal of all or part of that package of cuts if they couldn’t identify enough ‘new’ tax rises of their own. (I think it would be easy enough to make the general case that this is no time for tax cuts.)

12. Duncan Weldon

@ G.O.

1/ Agreed – although it starts to get trickier to explain at that point. Plus is borrowing being £12bn less not an example of growth closing the deficit? We can’t spend every additional penny we take in through extra growth.

2/ Yes.

3/ Do we really want Labour advocating lowering the income tax threshold?

On corporation tax – I wouldn’t have cut it myself, but hard to argue to raise given economic climate.

I’d accept the VAT rise as given, but allocate £3bn of the £12.5/13bn raised to compensating those worst hit by increasing benefits, tax credits and pensions.

@ Duncan:

“1/ Agreed – although it starts to get trickier to explain at that point. Plus is borrowing being £12bn less not an example of growth closing the deficit?”

It’s not *that* tricky to explain – at the end of the day Labour would just be putting forward ‘a plan to hit the target we set in March (in the light of up-to-date figures)’. And the messages that the deficit is not as high as feared, and that growth can take huge chunks out of it very quickly, are well worth getting across anyway.

As for whether we should ‘spend every additional penny we take in through extra growth’: we have a straightforward choice as to whether to use such money to cut the deficit further than originally planned, or to fund public services better than originally planned. And if we’ve decided that £83.5 billion (half of £167 billion) is an acceptable level for the deficit to be at in 2015, I don’t see why we shouldn’t stick to that target and spend the ‘extra’ money.

“3/ Do we really want Labour advocating lowering the income tax threshold? ”

I’t’s a bit of a hard sell, I know. But then do we really want Labour accepting that a rise in VAT, hitting the very poorest households, should be used to fund a tax cut that mostly benefits those on middle incomes? Maybe this is one of those ‘hard choices’ we keep hearing about.

“On corporation tax – I wouldn’t have cut it myself, but hard to argue to raise given economic climate.”

No harder than arguing that VAT should go up, though – that’s a bad thing for businesses too, after all, and coming at a bad time. And I’m sympathetic to the idea that corp tax cuts should be tied to the Living Wage, so there’s an opportunity here.

“I’d accept the VAT rise as given, but allocate £3bn of the £12.5/13bn raised to compensating those worst hit by increasing benefits, tax credits and pensions.”

I don’t know if would really hurt to say ‘we wouldn’t have done it’ (and explain *how* we could have avoided it) – especially as this really is a story of how the Coalition used one regressive tax rise to fund several regressive tax cuts (including tax cuts for banks, of course – a point worth hammering home). But yeah, once the change has happened, it makes more sense to focus on what happens next I suppose.

14. astateofdenmark

The OP hasn’t figured in the effect of cumulative savings. So if for example:

Party A says they will save an extra billion on the salary bill in year one.

Party B says they will only make that billion saving in year two.

Then Party A accumulates the initial saving, plus the reduction in debt servicing, plus the saving from base effects.

So simply summing up the in year differences doesn’t work, though it gives a pointer.

(ceteris paribus)


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    How Labour and Coalition deficit reduction plans match up http://bit.ly/cX7G0B

  2. smido

    RT @libcon: How Labour and Coalition deficit reduction plans match up http://bit.ly/cX7G0B
    Talks a good talk pls RT

  3. sunny hundal

    @lukeakehurst according to @duncanweldon it was darling's 52bn vs osborne's 80bn http://bit.ly/cX7G0B – not half

  4. Laura

    @allanandrews I'm not an economist (much like the Chancellor) but here are some figures: http://bit.ly/cLBGAx

  5. sunny hundal

    @art_li this was the original plan http://t.co/iqk8YAoa

  6. Conservatives aren’t sure if they saved the economy or copied Labour plans | Liberal Conspiracy

    […] Weldon crunched the numbers for us then and explained that the difference between Alistair Darling and George Osborne’s plan was […]





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