With no Budget, no OBR report and no party manifestos, as the UK heads towards the 12 December general election the fiscal landscape seems uncertain, transient, shrouded in mist. 2017 figures from the Labour Party indicate a clear intention at the time to fund spending increases from increased taxes on high-earners and the wealthy. Since then, the Labour Party has been seeking voter responses to ideas for further expenditure increases, but we will have to wait for the publication of their election manifesto to see how those will be paid for.
Meanwhile, following earlier indications of tax cuts, the Conservative party to is promising expenditure increases with no commitment yet as to how those might be funded. No doubt the detail will be in the manifesto. On the Conservative side the one clear indicator is a statement from Chancellor of the Exchequer Sajid Javid suggesting that, if he is reappointed to that role, he will look to increase borrowing while interest rates are low. However, with the existing fiscal framework already under strain, there may be a limit to how far the new Chancellor can go.
So where does that leave us?
A report from the Resolution Foundation draws five clear conclusions:
- austerity has produced an unprecedented pause in spending growth over the last decade;
- Government spending is rising once again, and likely to head back towards the heights of the 1970s over the coming years;
- the shape of the state has change significantly over time, with policy choices meaning spending on health and on older people has come to account for an increased share of the total;
- the ageing population looks set to double-down on that changing shape over the coming decades; and
- expanding the state to deal with the austerity legacy and meet the coming demographic challenge requires an expansion in revenues too. More generally, the next government needs to establish a new fiscal framework.
We will have a much clearer idea what the impact will be once the party manifestos are available. For now, it’s an absolute certainty that – once delivered – promises to increase expenditure will have to be paid for. Borrowing seems able to cover only part of that. Growth in the economy will be crucial. Beyond that, tax increases seem inevitable.