21 April 2017

Theresa May has called an election to give her space to negotiate her vision for Brexit. But, as Jill Rutter argues, avoiding commitments that prevent her government from solving public finance problems will be just as important.

Elections can be dangerous times for sensible policy making. The risk is that governments take office but with their options for public spending decisions so constrained, they lack the flexibility they need to meet predictable challenges and to respond to unforeseen events.

Future ministers may make planned commitments.

In 2010 the Conservative Party pledged to maintain real term increases in NHS funding, to reassure on health (they also pledged no top-down reorganisation of the NHS – but that is another matter). Further ring-fenced areas have been added since: on schools, defence and most notably on aid where the 0.7% target has been enshrined in legislation. One or two ring-fences can signal a government’s priorities, but when the bulk of public spending is covered by ring fences, they lose their signalling power and just become constraints on decision making.

They may be bounced into pledges by events.

In 2010 David Cameron conceded pledges on pensioners, which were to prove very expensive. The Conservative manifesto contained a pledge to restore the earnings link for pensions, which before then had only gone up with prices, to protect some of pensioner benefits. But during the election debate, he committed to retaining a whole range of pensioner benefits under pressure from the then Prime Minister, Gordon Brown. The Coalition added another twist – the so-called triple lock on pensions upratings – to go up by prices, earnings or 2.5%, whichever is higher. The net result means that pensioners are the only group who have seen significant real rises in living standards since 2008. Yet in 2015, rather than seek more flexibility, these promises were reconfirmed for another Parliament.

Or future ministers can gratuitously shoot themselves in the foot.

The 2015 Conservative manifesto also pledged no increase in the rates of value added tax (VAT), income tax or national insurance contributions (NIC). But during the campaign, David Cameron converted that pledge into a so-called “tax lock” – legislation to prevent rises in VAT, main income tax or NIC rates for the duration of the next Parliament: something even his Strategy Director, Ameet Gill, denounces as “probably the dumbest economic policy that anyone could make, but we kind of cooked it up on the hoof a couple of days before, because we had a hole in the grid and we needed to fill it”. Despite Treasury attempts to water down the impact in legislation, that “tax lock” pledge meant that the current Chancellor, Philip Hammond, was forced to U-turn on his Budget measures to raise NIC rates for the self-employed, despite it being generally regarded as a sensible way of levelling the playing field and preventing erosion of the tax base. When he backed down, Hammond still defended the policy, but noted that people thought it was inconsistent with the spirit – if not the Treasury’s view – of the manifesto.

Reassuring the public vs making hasty pledges 

So, the challenge for politicians of all parties in an election is to balance the need to reassure the public and clarify their plans for office while avoiding the sort of hasty commitments that will be regretted over the next five years in government. As the Liberal Democrats found out in 2010, a pledge that you thought was cheap to make but would never need to make good (or bad) on can come back to bite you. Our research shows that the public take a dim view of politicians who don’t keep their promises.

In the next six weeks, the parties will come under increasing pressure. At the IMF spring conference today and in the Commons earlier this week, Philip Hammond refused to renew commitments on the tax lock. That is a start. He and the Prime Minister need to maintain that line through the campaign. But if they want to eliminate the deficit in the next Parliament and have the flexibility to deal with a downturn, they need to go further. They need to avoid expensive tax reduction pledges – like the inheritance tax commitment in the last Conservative manifesto, which by next year will cost just under £1 billion a year, or the pledge to hike the personal allowance, which is still not accounted for in the Office for Budget Responsibility’s fiscal forecast.

The Prime Minister and the Chancellor will also need to “unlock” areas of spending, for example, on pensioner benefits, to give them room to move on other services like the NHS and social care.

Last year, when she launched her Conservative leadership bid, Theresa May suggested we needed to talk about taxes and the public services we wanted. Her rapid elevation to the premiership meant we missed out on having that conversation. It might be hoped that she will take the chance in election 2017. But if we can’t have a sensible conversation, a vow of silence would be a much better option than repeating – and regretting – past pledges.

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