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Last Updated: Wednesday, 13 April, 2005, 15:16 GMT 16:16 UK
Election issues: Tax and Spending
ANALYSIS
By Jenny Scott
BBC economics correspndent

Bank of England
The central plank of Labour's economic manifesto was a promise to foster long-term stability.

They wanted to eliminate the boom-bust cycle typical of the 70s, 80s and 90s.

And indeed, the British economy has grown continuously for 12 years, avoiding the recessions that have hit most of the major industrial countries. The Conservatives can take some credit as they presided over the initial period of growth - and the world economy has been favourable.

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However, the government's decision to hand independence to the Bank of England also played a pivotal role by taking politics out of interest rates decisions, leading to lower and steadier inflation.

Greater fiscal discipline has helped too, enshrined in the government's fiscal rules.

IS IT DEVOLVED?
Scotland: Partly Devolved
Wales: Not Devolved
NI: Not Devolved
Devolved issues are the responsibility of the Scottish Parliament, Welsh Assembly, or NI Assembly. The Scottish Parliament has tax-varying powers but is not using them.

These state that the government will only borrow money so as to invest over the economic cycle, and that total government debt will not exceed 40% of national income.

Fiscal rules

Meeting the second rule has been relatively easy - debt is currently around 33% of GDP - but meeting the first, the so-called Golden Rule, has been trickier.

A substantial rise in government spending, combined with disappointing tax receipts thanks to a slowdown in the economy, have conspired to push the Golden Rule to its limits.

That's made it hard for the part of the budget which pays for things like nurses and school text books, anything that's not investment - to be in balance over the course of this economic cycle which ends next year. It's going to be a close-run thing.

Tax rises

The chancellor has probably done enough in his March budget to ensure he meets his rule, but it will be tight, and it leaves the public finances running on empty going into the next cycle.

Which means one thing. Tax rises.

So far, the government has stuck to the letter of its 2001 election pledge not to raise either the basic or top rates of income tax, but, arguably, only through semantics.

And it has repeated that pledge to freeze the basic and top rate of tax for the next Parliament, but has refused to rule out other tax increases.

In the last four years the government hass raised numerous other taxes, from stamp duty to excise duties.

It's even raised National Insurance by 1%, a rise in income tax in all but name.

As a result, by next year, Labour will be collecting about 26bn a year more in government revenue than the Conservatives did in 1996-97.

Pensioners protest at Westminster
Pensioners have been hard hit by council tax rises
According to the independent Institute for Fiscal Studies (IFS), about a third of that is due to policy announcements by the Chancellor Gordon Brown, another third is thanks to Conservative decisions he didn't fully reverse and the other third is due to fiscal drag.

This means that more people being dragged into the top income tax band as their earnings rise faster than the increases in the tax thresholds.

Council tax

Then there's the thorny issue of council tax.

Labour didn't make any manifesto pledges about local taxes so cannot be accused of lying to the electorate, even though increases mean local government will raise a net 5.8bn more in 2005-06 than they did before Labour came to power. (Local council taxes are a devolved matter in Scotland).

In the budget, Labour pledged a one-off payment of 200 to pensioners to help cut their council tax bills

Looking ahead, there is a distinct possibility that taxes will rise even further.

The IFS estimates the government will have to raise 11bn in taxes if it wants to restore the public finances to the state aimed for in the 2004 budget - that's equivalent to 3p on the basic rate of income tax or national insurance.

There is a clear distinction between the parties on tax.

The Conservatives want to use 4bn to reduce taxes.

They've already pledged to spend 1.3 billion of that reducing council tax bills for pensioners.

The Liberal Democrats want to raise taxes.

Free care for elderly

They propose a new 50% top rate of income tax for earnings over 100,000 which they say will raise around 30bn over a five-year parliament.

That has been earmarked for a new local income tax, scrapping tuition fees and providing free personal care for the elderly. (The latter two proposals have already been implemented in Scotland by the Scottish Parliament, controlled by a Liberal Democrat - Labour coalition.)

However, experts say that figure may be slightly optimistic, as it assumes everyone carries on working as before.

In practice, higher earners faced with such a high tax rate may choose to work less or retire early, for example, reducing tax revenues.

Nurses
Labour and the Conservatives have clashed on public spending plans

The other central plank of the Liberal Democrats' tax plans is to replace the council tax with a local income tax, probably levied at between 3.5% to 3.75%.

That would benefit those who are income poor but housing rich, for example some pensioners.

The IFS estimate that almost half of families would gain more than 1 a week under the policy, around a quarter would be unaffected, while the the remaining quarter would be more than 1 a week worse off.

Spending plans

There is also a distinction emerging on the parties' spending plans - though it's not as large as Labour would have voters believe.

It has claimed that the Tories will cut public spending by 35bn, leading to big cutbacks in front-line services.

However, in fact the Tories plan to increase spending by 2% each year, compared with Labour plans to increase it by 3%.

And the Conservatives have pledged to maintain spending on health and education, and spend more on defence, pensions, and the police.

The Liberal Democrats want to spend slightly more than Labour.

So by 2007/8, the Tories are planning to spend 12 billion less than Labour while the Lib Dems plan to spend 3 billion more.

Value for money?

Assessing the government's record on the economy and taxation is relatively straight forward.

Giving it marks out of ten for delivering value for money in public services is much more difficult.

How do you meaningfully measure output in the health sector or education?

How do you judge whether a nurse's time is best spent at a patient's bedside or in an operating theatre?

The National Statistics Office has suggested that productivity in the health sector has improved, implying greater efficiency along with the extra funds that have been pumped in.

But all three parties concede that massive inefficiencies in the public sector remain.

Potential savings

Both Labour and the Conservatives have identified 22bn and 34bn respectively of waste in the public sector which they've pledged to cut.

The Conservatives would pump 22bn of their savings back into public spending and use the remaining 12 billion to cut taxes (4bn) and plug what they say will be a shortfall in the public finances (8bn).

However, relying on cuts in public waste to fund tax giveaways is notoriously difficult, and some doubt whether the Conservatives' plans stand up to scrutiny in this respect.

The Liberal Democrats are also targeting waste. They want to abolish whole government departments like the DTI, the ODPM and make big savings from the DEFRA budget. Again, the same caveats apply.





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