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

by Stephen Tall on October 16, 2014

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 Tall is Co-Editor of Liberal Democrat Voice, and editor of the 2013 publication, The Coalition and Beyond: Liberal Reforms for the Decade Ahead. He is also a Research Associate for the liberal think-tank CentreForum and writes at his own site, The Collected Stephen Tall.