U.K. Think Tank Criticizes Fiscal Plans of Both Major Parties, Warns of Higher Taxes

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A leading U.K. think tank offered a damning analysis of both the Conservatives’ and Labour’s election pledges, and warned voters to expect higher taxes than either party has outlined.

In a brutal assessment of both manifestos for the Dec. 12 vote, the Institute for Fiscal Studies said that “neither is a properly credible prospectus.”

Prime Minister Boris Johnson’s Conservatives and Jeremy Corbyn’s Labour have outlined vastly different offerings for voters. While Corbyn is promising a generational shift in public spending along with sweeping nationalization plans, the ruling party is presenting a more prudent approach, offering themselves up as the responsible alternative to Labour’s radical ideas.

The analysis comes a day after a much-anticipated poll put the Tory Party on track to win its biggest majority in more than three decades. The poll suggested it will win 359 of the 650 seats in Parliament, a gain of 42 on the last election — and a majority of 68 — while Labour will drop more than 50 seats to 211.

The IFS sees problems with both parties’ manifestos. In its assessment, the Tories will end up spending more than planned, and so will have to raise taxes or borrow more, and Labour won’t be able to deliver on the investment plans on the scale it imagines. In the longer term, Labour would also need to raise more funding, and the IFS says it would have to hike income taxes on more than just the top 5% of earners.

Responding to the IFS, Shadow Chancellor John McDonnell said that Labour accepted “with pride” claims that its plans are too ambitious. “We are ambitious for our country and will be investing on the scale needed to end austerity, tackle climate change and build our country’s future,” he said. Chancellor Sajid Javid, speaking to reporters during an election campaign visit to northeast England, said he’s “confident” about the Conservatives’ manifesto costings.

Much of what’s planned in the manifestos, and its impact on the public finances, depends on the performance of the economy. Brexit is a huge factor in that equation, and the IFS notes that if the Conservatives retain power and implement Brexit at the end of January, there’s still the huge task of negotiating a settlement by the end of 2020. Failure could push the budget deficit to 4% of output, and the debt ratio “would once again rise sharply.”

Doubts Cast

Earlier Thursday, the Resolution Foundation released calculations showing the two parties are on course to break the fiscal rules they announced less than a month ago. Election pledges made in recent days mean both may find it hard to meet promises to keep revenue and day-to-day spending in balance, while even a tiny downgrade to the economic outlook could cause further problems, it said.

At a briefing in London, IFS Deputy Director Carl Emmerson said the manifestos imply borrowing of just over 2% of GDP with debt remaining steady under the Conservatives, and 3.5% of GDP with rising debt under Labour. However, the Conservatives could potentially prove more damaging to the public finances as a no-deal Brexit and an accompanying economic downturn appeared more likely to happen under a Tory government.

On tax, the IFS cast doubt on whether Labour’s planned raid on corporations would raise as much as estimated. Companies could move abroad to avoid a proposed extension of the levy on financial transactions, it said. A proposal to force companies to hand over equity to worker-owned funds may do little to help employees if firms respond by reducing wages.

The IFS also took aim at Labour’s 58 billion-pound promise to compensate women born in the 1950s who lost out as a result of changes to the state pension age, saying it amounted to a “recipe for complete stasis in policy.”

“They would spend considerably more over a parliament on a group who are relatively well off on average than the additional sums they are providing to the much bigger group of much poorer working-age benefit recipients,” Johnson said.

(Adds comments from IFS briefing)

To contact the reporters on this story: Fergal O’Brien in Zurich at fobrien@bloomberg.net;Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net, David Goodman, Lucy Meakin

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