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Labour and Tories both on track to break their new fiscal rules, think tank finds

3 min read

Both Labour and the Conservatives are on track to break their newly-set fiscal rules thanks to a raft of big-ticket election spending pledges, a think tank has warned.

Analysis by the Resolution Foundation of the two main parties’ tax and spending plans finds that extra promises unveiled in the manifestos and on the campaign trail risk breaking limits set just weeks ago.

Both Sajid Javid and John McDonnell have announced plans to increase borrowing for the next government.

Mr Javid has said he will up borrowing from below 2% of national income to 3% to invest £20bn extra a year in public services.

Mr McDonnell has meanwhile said a Labour government will exclude borrowing for investment in the Government’s budget targets.

According to the research, the Conservatives' "thinnest of margins" for keeping the books balanced means that even a “tiny downgrade” in its fiscal outlook would result in ministers needing to raise taxes or impose fresh spending cuts.

The Conservatives have argued that they are on course to have £5bn of headroom by 2023 by balancing day-to-day spending and receipts within three years.

But the Resolution Foundation says those projection fail to take into account the full implication of Tories' investment plans, which could end up increasing current spending by £1bn.

The party has meanwhile failed to fund its £6bn pledge to eventually raise the National Insurance threshold to £12,500, the think tank warns.

"It is the smallest headroom any Chancellor has had against a new fiscal rule, and has an 86 per cent chance of being wiped out, given the pattern of historic errors in forecasting the current balance three-years ahead," the report says.

On a future Labour government, the think tank warns that Labour may need to row back on “several” manifesto pledges, introduce further tax rises or take a big hit on economic credibility to avoid surpassing its own fiscal rules.

The Foundation said Labour’s plans for £6bn of fiscal headroom over the course of its first term in office are “more than wiped out” by its newly-unveiled £58bn commitment to compensate women hit by the state pension age rise, and by failing to account for £10 billion interest and depreciation costs that their investment plans could add to current spending.

The party disputes the Resolution Foundation's calculations.

Resolution Foundation research director James Smith said the parties were right to adopt new approaches and widen their focus away from debt levels, but that both Labour and the Tories have failed to account for the wider costs of their investment plans.

“The parties seem all too willing to bend or even break their own fiscal rules before they’ve even got started," he said.

“The Conservatives have left themselves almost no fiscal headroom, and would fail to balance the books with even the smallest deterioration in the economic outlook.

“Labour meanwhile already look to have broken one of their rules with a £58 billion unfunded spending commitment to WASPI women.

He added: “After a decade of austerity, the desire of politicians to move on and invest in our economy is understandable.

"But taking huge risks with the brand new fiscal rules that are supposed to bind the next government for its whole time in office risks seriously undermining the UK’s economic credibility, at a time when it is already under strain.”

However, Shadow Chancellor John McDonnell pushed back at the report.

The Labour frontbencher said: "This report is inaccurate in its description of Labour’s position. Our investment programme, supported by a fiscal rule which aims to leave the Government better off, means depreciation of existing assets will be lower under Labour.

"We also make no apology for clearing up the mess created by the Conservatives and Liberal Democrats when they took the pensions of women born in the 1950s."

The Conservatives have been contacted for comment.

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