Manifesto Check: stacking up Labour's deficit reduction plans

The Conversation Manifesto Check brings academic expertise to bear on the political parties' key election pledges.

A key tenet of the Labour Party’s manifesto is the commitment to reducing the budget deficit year-on-year through the lifetime of the next parliament. The manifesto views the UK economy as exhibiting key structural weaknesses. These include poor productivity growth and a stagnation in living standards.

There are a range of measures designed to address this by attempting to raise productivity as well as targeting the cost of living. Although the point is not made explicitly, sustained growth is required for this programme to be achieved.

The deficit elimination challenge

Labour’s pledge not to raise the basic rate of income or corporation tax, VAT or National Insurance will make eliminating the budget deficit challenging. There are, though, clear differences between Labour’s proposals and those of the Conservatives and Liberal Democrats. The timescale for eliminating the deficit is longer and Labour has still allowed itself room to borrow to finance investment – how much remains unclear.

In other respects there are strong similarities between Labour’s proposals and those of the coalition partners. The same key budgets are ring-fenced – health, education and foreign aid (though Labour includes higher and further education whereas the Conservatives appear only to be ring-fencing the schools budget). Incidentally, the aid budget is tiny, at around 1.4% of government expenditure.

This means that cuts – the Labour manifesto explicitly uses the term – would have to fall on those departmental budgets that have already borne the brunt of these under the coalition. There is an explicit commitment to cap the welfare budget. Although winter fuel payments would be ended for wealthier pensioners, as with the coalition, the burden would fall on working age benefits. This is partly linked to other measures to help workers – raising the minimum wage and promoting the living wage should reduce working tax credits and promoting house building should help to reduce the housing benefits bill.

Although Labour makes a concerted attempt to cost its commitments and indicate how they would be funded, questions remain. Cost savings, closing tax loopholes and clamping down on tax evasion are measures that governments regularly propose, but it isn’t clear that they would be sufficient.

Achieving growth

More fundamentally, governments do not determine the budget deficit – contrary to the impression given by much of the media and indeed politicians. Governments do set tax rates and expenditure plans, but the deficit (or surplus) is ultimately determined by growth in the economy.

The Labour manifesto recognises that growth, and rising incomes leading to more tax receipts, will eliminate the deficit. A series of measures are proposed for this, in particular a guarantee of apprenticeships for suitably qualified school leavers and introducing a British Investment Bank and regional banks together with measures to reform the financial system to promote longer term investment.

Historically the British economy has shown weaknesses in investment and in skills, particularly among non-graduates. Since the start of the financial crisis productivity and real wages have stagnated in the UK. Productivity is only likely to rise with higher investment and improved skills. Addressing the medium-run weaknesses of the British economy here is therefore desirable.

This is against a background of a dearth of profitable investment opportunities in advanced economies. Companies will only invest if they believe demand for their products will materialise – something that would be hampered by continued austerity.

Jonathan Perraton does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.