It is likely that there will be tax increases after the election - whoever wins, according to ‘Austerity’ by John Van Reenen, the latest in a new CEP #ElectionEconomics series. See http://cep.lse.ac.uk/electi...
Objective, brief and non-technical, CEP Election Analysis is a series of background briefings on the policy issues in the May 2015 UK General Election, from the Centre for Economic Performance.
Austerity: growth costs and post-election plans
• At the end of 2014, UK GDP per person was about the same as it was at the end of 2006. Britons were about 16% poorer than would be expected from pre-crisis trends (from 1970).
• The coalition government’s establishment of the Office for Budget Responsibility (OBR), which gives independent economic and fiscal forecasts and assesses government tax and spending plans, is welcome.
• Fiscal consolidation (‘austerity’) reduced GDP growth by 1% in both 2010-11 and 2011-12, according to the OBR. Recent research on the impact of government spending in recessions suggests that this is likely to be an underestimate of the negative impact.
• Some of the UK’s poor performance has been due to the Eurozone crisis, where countries also pursued tough austerity policies. Financial dislocation and high commodity prices were also drags on growth.
• The arguments for accelerated austerity after May 2010 were to boost consumer confidence, to avert a Greek-style debt crisis and/or to allow looser monetary policy. None of these justifications are convincing.
• Based on plans in the 2014 Autumn Statement, public service spending (DEL) will be reduced by 22% in real terms between 2010-11 and 2019-20. The result would be that public spending as a share of national income would fall to its lowest level since 1948.
• The Autumn Statement plans cuts in spending on public services of 14% between 2015-16 and 2019-20 to generate a total budget surplus. Unprotected departments (those outside the NHS, schools and overseas aid) face cuts of over a quarter, on top of cuts of a fifth in the previous five years.
• The public services cuts set out in the 2014 Autumn Statement are tougher than those implied by the fiscal rules of Labour at 1.4% and the Liberal Democrats at 2.1%. Moreover, they are even tougher than the official position of the Conservative party, at 6.7%.
• All the main parties plan to balance the cyclically adjusted current budget by 2017-18 and reduce debt over the next Parliament. Only the Conservatives plan to have a surplus on the overall budget by 2019-20, so their plans imply both lower spending on public services and less room to borrow for additional public investment. Given longstanding problems of low UK public investment, which acts as a break on productivity, this is a cause for concern.
• The fiscal plans of Labour and the Liberal Democrats would result in slightly higher growth and lower unemployment, but also slightly higher debt than those of the Conservatives.
• Net taxes have risen by around £5 billion following each election since 1992. Given the magnitude of the spending cuts required, it is highly likely that there will be some unexpected tax hikes regardless of who wins power.
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