The Labour government’s 2010 Budget set out the size of its planned tightening in each year. It aims to withdraw the temporary fiscal stimulus package this year, start tightening in 2011–12 and finish the job in 2016–17, with the pain front-loaded in the earlier years. The Liberal Democrats have informally endorsed this tightening profile.
The Conservatives want to start tightening earlier and proceed more quickly. They plan an additional £6 billion tightening this year and would aim to get almost all the repair job done a year earlier than Labour and the Liberal Democrats in 2015–16.
The Conservatives’ greater ambition would make a relatively modest difference to the long- term outlook for government borrowing and debt. The Conservative plans imply total borrowing of £604 billion over the next seven years, compared with £643 billion under Labour or the Liberal Democrats. Assuming no further change in borrowing beyond 2017–18, we project that the Conservative plans would return government debt below 40% of national income in 2031–32, the same year as it would under Labour or the Liberal Democrats.
Differences between the parties are much more pronounced with regards to the composition of the tightening. Labour favours a 2:1 ratio of spending cuts to tax rises (£47 billion and
£24 billion, respectively), the Liberal Democrats a 21⁄2:1 ratio (£51 billion and £20 billion) and the Conservatives a 4:1 ratio (£57 billion and £14 billion). Measured as shares of national income, the Labour and Liberal Democrat plans would reduce public spending to a level last seen in 2004–05 and increase tax revenues to their highest since the peak of the late 1980s boom in 1989–90. The Conservatives would reduce total spending to the level seen in 2003–04 and increase revenues to the level seen in 2006–07.
Measured as a share of national income and converting into 2010–11 terms, Labour has already put a £17 billion tax increase into the pipeline for the coming Parliament. We estimate that its goals for borrowing and the overall composition of the fiscal tightening would require it to announce further tax increases worth around £7 billion. The Conservatives have announced a £6 billion net tax cut on top of what is in the pipeline from Labour, but their goals would probably require them to reverse about half of it. The Liberal Democrats have announced a £3 billion tax increase on top of what is in the pipeline and would not need to do anything further. The rise in the tax burden by 2016–17 would be largest under Labour and lowest under the Conservatives, with the Liberal Democrats in the middle.
Far more significant is the gap in the parties’ plans for reducing public spending. None has announced plans for significant cuts to social security spending and, without them, their plans would require deep cuts to spending on public services. Over the four years starting in April 2011, both Labour and the Liberal Democrats would need to deliver the deepest sustained cut to spending on public services since the four years from April 1976 to March 1980. Starting this year, the Conservative plans imply cuts to spending on public services that have not been delivered over any five-year period since the Second World War.
Once we take into account their various pledges to protect spending in certain areas, in real terms the Conservatives would need to cut public services spending in their unprotected areas by £63.7 billion, Labour by £50.8 billion and the Liberal Democrats by £46.5 billion between April 2011 and March 2015. Of these, the Conservatives have announced measures that would bring about 17.7% of the total cuts they need, leaving a shortfall of £52.4 billion. Labour has announced measures that would bring about 13.1% of what it would need, leaving a shortfall of £44.1 billion. The Liberal Democrats have announced measures that would bring about 25.9% of what they would need, leaving a shortfall of £34.5 billion.
