27 November 2019

The Labour and Conservative manifestos offer voters a choice between a bigger state and a much bigger state, but Thomas Pope says these visions will be hard to deliver without stronger economic growth.

Party manifestos make clear that public spending will increase significantly over the next few years. But the electorate still faces a stark choice – between a modestly bigger state under the Conservatives, and a much bigger state under Labour. And their offers are not just over how big the state is, but over what it will do. What the manifestos can't promise, however, is the economic growth that might well be needed to pay for all those policies.

The manifestos make clear that the next government is going to spend more money

The Conservative manifesto was light on tax and spend measures and proposed increasing day-to-day spending by only £3bn in 2023/24. But those are increases on top of existing plans that would see day-to-day spending increase by around £30bn in real-terms over that period. Add in their plans to significantly increase capital spending, and this implies a bigger state – more government spending relative to the size of the economy – by the end of the next parliament.

Yet if the Conservatives are planning a somewhat larger state, this is nothing compared with Labour’s plans to increase day-to-day spending by £83bn on top of existing planned increases and spend up to an additional £55bn a year on investment. This would increase spending to the highest sustained level in the UK’s history as a share of national income outside of recessions, although this would still be less than some other European countries spend.    

The two main parties are offering competing visions of what the state will do

The differences between the parties’ spending offers are not just a matter of scale. While the Conservatives plan to increase day-to-day spending by £30bn, 70% of that is taken up by pledged increases in the NHS and schools’ budgets – which is only likely to be enough to meet demand in these areas. That leaves very little space for an increase in the scope and quality of public services, and may not be sufficient to maintain some existing services such as social care.

On the other hand, Labour would expand the role of the state significantly. Not only would it provide more funding than the Conservatives have promised for schools and hospitals, it would also increase spending on under pressure areas like local government and prisons. More radically, under Labour the state would also provide universal access to free childcare, free university tuition, free wi-fi, and free in-home social care for over-65s. That is a significant reimagining of what the state should do.

A similarly stark difference exists in the parties’ plans for capital spending and infrastructure. Both would spend more, but Labour would also nationalise “rail, mail, water and energy”. And, while the Conservatives would increase the generosity of tax credits for research and development (R&D), Labour would scrap them and fund more R&D directly.

Without stronger economic performance the Conservative and Labour manifesto visions may not become reality

Are these visions affordable? The Conservatives’ manifesto promises “world class public services” and a “solution” to social care, but their costed plans are insufficient to satisfy those objectives. Meanwhile, Labour’s manifesto proposes large tax increases to cover their costed day-to-day spending pledges. But some of those measures seem likely to raise less than Labour have assumed, and they have also made significant additional spending pledges that were not included in their “fully costed” manifesto (for example to the first cohorts of women affected by increases in the state pension age). 

Both parties have restricted themselves to spending no more on day-to-day items than they raise in tax. So if they are to deliver the visions their manifestos set out, they will need more money from somewhere – and delivering improved public services without tax rises looks, on existing economic forecasts, hard to achieve.

There is nothing in the manifestos to guarantee higher than expected economic growth 

The new government will instead need to hope that the economy performs more strongly than the current forecasts imply – higher growth would mean more economic activity and so more tax revenue. Dismal productivity growth over the last decade is the main reason why reducing the deficit from its high in 2010 has taken so much longer than planned, and a return to pre-crisis growth rates would loosen the spending constraints considerably.

But an improvement in the economic forecasts is by no means guaranteed. The official forecasts are ‘central’, meaning that they are just as likely to be optimistic as they are to be pessimistic. And, while the parties’ proposals for extra capital spending should – if spent well – boost productivity, some of their other proposals could reduce economic growth. For the Conservatives, a more distant trading relationship with the EU would be likely to slow economic growth, while Labour’s plans for significant increases in taxes on companies and a four-day working week could also have the same effect.

There is nothing in the manifestos to guarantee higher than expected growth, so the next government needs to get lucky and find itself in power when the UK’s decade-old productivity puzzle resolves itself. The next government is likely to need that luck if its vision for a bigger state – without taxes increases for most people – is to become a reality.