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Wednesday, 16 May, 2001, 13:05 GMT
Labour: The economy

Read more about the Labour Party's policies on public spending, taxation, and the economy


BACKGROUND

The Labour Party places great importance on being the party of economic competence.

That means there will be no return to the "tax and spend" policies of previous governments.

Rather, the Labour Party, and especially the Chancellor, Gordon Brown, have emphasised prudence and fiscal restraint, deciding to eliminate the Budget deficit and pay down government debt while keeping a tight rein on spending.

Now Labour says it can harvest the fruits of restraint, and plans substantial spending increases over the next few years, especially on health, education, and law and order.

It is also using the tax system to boost the incomes of low-income families and pensioners through targeted tax cuts.


THE ECONOMY

Labour has argued that it is important for the economy to grow at a steady pace - there should be no return to "boom and bust".

So far, this seems to be working, with the strong economic growth that began under the Conservatives continuing over the past four years.

The number of people claiming unemployment benefit has fallen to 1m, its lowest for 25 years, and inflation is well below its 2.5% target.

Labour argues that controlling inflation and public spending has created the stability that allows businesses to flourish and the economy to grow.

Labour's biggest change in managing the economy was to give operational independence to the Bank of England's Monetary Policy Committee to set interest rates.

However, the Chancellor still sets the inflation target and appoints four of the nine members of the MPC.


TAXATION

Labour came to power in 1997 pledging that there would be no increase in the basic or higher rate of income tax.

And it kept to that pledge, even reducing the basic rate to 22p in return for the abolition of mortgage tax relief.

It even introduced a new "starting rate" of income tax of just 10p for the first 1,520 of taxable income.

The income tax pledge has now been restated for the 2001 general election.

But some taxes, especially indirect taxes and taxes on businesses, have gone up under Labour.

Overall, taxes have risen at an annual rate of 4.8% in the last Parliament - higher than under the Conservatives.

Some of those tax increases, for example the so-called fuel escalator of above-inflation increases in petrol duties, were put into place by the previous government.

After the fuel protests, Labour first froze petrol duties, and has now lowered them by 2p a litre for ultra-low sulphur petrol.

And the headline rate of corporation tax has been lowered to 30%. But companies have lost out from the abolition of tax relief paid to occupational pension funds on their share holdings, and changes in the way advance corporation tax is paid..

Labour argues it had no choice but to keep up the levels of taxation in order to eliminate the huge budget deficit it inherited when it came to office.

But under Chancellor Gordon Brown, the government has embarked on a series of "targeted" tax cuts to help families with children, pensioners, and people who save.

The biggest gainers have been families, who have received an extra 520 per year through the child tax credit, and low-paid families with children, who now have a guaranteed income of 220 per week through the Working Families Tax Credit.

However, the abolition of mortgage tax relief and the married couples allowance has raised the tax bill for many single people and childless couples.


PUBLIC SPENDING

Labour says it wants to deliver better public services to all, and it has plans for big increases in spending on health and education over the next three years.

However, public spending was kept under tight control during the first two years of the Labour government in order to help eliminate the Budget deficit.

As a result, Labour's overall spending levels now are not much changed from those in the last year of John Major's government.

As a proportion of the total economy, public spending now makes up just 38.8% of GDP, compared to 41.2% when John Major left office.

However, there has been a big change in where the money is being spent. The booming economy has reduced spending on cyclical unemployment benefits, leaving more room for spending on public services.

Labour's welfare reforms, like welfare to work, it argues, have also helped reduce spending on social security.

Labour's budget surplus means that it is able to raise spending on public services now without having to raise taxes.

But the independent Institute for Fiscal Studies has warned that in the latter half of the next Parliament, Labour would have to increase taxes if it wanted to raise spending at the same rate.

Labour also wants more spending on capital projects like schools, roads and hospitals, and has pledged to work with the private sector in initiatives such as the Private Finance Initiative to boost spending.

However, while it increases public spending, it has pledged to stick to the "golden rule", only borrowing money to fund capital spending and funding all other government spending through taxation.

And so far underspending by government departments has meant that public investment has fallen well below target.

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