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Labour Manifesto: An Initial Reaction from IFS Researchers

The recently unveiled Labour Party manifesto has caused quite a stir, with its ambitious plans for an increased role of the state. In today's article, we will provide an initial reaction from the researchers at...

Labour Manifesto

The recently unveiled Labour Party manifesto has caused quite a stir, with its ambitious plans for an increased role of the state. In today's article, we will provide an initial reaction from the researchers at the Institute for Fiscal Studies (IFS) on the Labour Party's manifesto.

A Substantial Increase in State Role

According to Paul Johnson, the IFS Director, the Labour Party's manifesto offers a significant increase in the role of the state, surpassing even the promises made in their previous manifesto. Their proposed measures are estimated to push up day-to-day spending by £80 billion in 2023-24, representing a substantial 10% increase from current levels. Additionally, their tax raising measures are expected to bring in a similar sum, pushing the tax burden to levels not seen since World War II. The party also plans to double investment spending, surpassing the proposals put forth by the Liberal Democrats and the Conservatives.

However, these proposed spending increases and tax rises come with risks. Delivering such a scale of increase in capital spending efficiently and cost-effectively would be extremely challenging. Scrapping Universal Credit and replacing it with a new benefit system would introduce administrative complexity and costs. Keeping the state pension age at 66, rather than allowing it to rise with increasing life expectancy, would add a projected £24 billion per year to spending by the 2050s. The commitment to abolish university tuition fees, while popular, may pose challenges in maintaining a system without a cap on student numbers.

On the tax side, the Labour Party proposes an enormous increase in the amounts raised from corporation tax. If implemented as suggested, the UK would have the highest corporation tax burden among G7 countries and many others in the OECD. It should be noted that corporation tax burdens eventually impact workers, customers, or shareholders, affecting a large portion of the population. Raising the sums proposed by Labour solely from the tax policies outlined seems unlikely.

Taxes and Their Impact

Labour's proposed income tax rise for those earning over £80,000 would only affect the top 3% of adults, contributing less than a tenth of the additional revenue Labour aims to raise. The majority of the revenue comes from increasing taxes on companies and their shareholders. It is crucial to understand that this tax burden does not fall solely on the rich. Corporation tax affects everyone with a defined contribution pension, and much of the burden is passed on to employees through lower wages and customers through higher prices.

Labour intends to raise the main rate of corporation tax to 26% and reintroduce a small profits rate of 21%. While these changes would move the UK from one of the lowest rates in the OECD to above average, the long-term impact on revenue is uncertain. Higher rates may reduce investment, productivity, and wages in the UK. Although some of Labour's proposed reforms to the taxation of capital gains and dividends could be beneficial, the proposal for a financial transactions tax raises concerns.

Tax Rates

Total Public Spending

Labour's manifesto includes plans for a significant increase in day-to-day and investment spending. By 2023-24, they aim to increase day-to-day spending by £80 billion, along with an additional £55 billion of investment spending each year. These plans indicate a marked expansion in the size of the state and a departure from recent trends. If implemented, Labour's proposals would take total government spending as a share of the economy to levels last seen in 1976-77, a significant change for the UK.

State Pension Age and Working-Age Benefits

Labour has pledged to keep the state pension age at 66, abandoning the Conservative Party's plans for an increase. However, Rowena Crawford, an associate director at IFS, highlights the potential cost of this decision. Keeping the state pension age at 66 could add approximately £24 billion per year to state pension costs by the late 2050s. Alternatively, gradual increases in the state pension age would accommodate rising life expectancy and ensure a more equitable distribution of benefits.

Labour's plans for working-age benefits include a significant increase in spending, but these pledges do not fully reverse the cuts made since 2010. While the proposed benefit increases would benefit some, they lack specific targeting towards low-income working households. The manifesto also proposes changes to the transition of benefit claimants onto Universal Credit, with new claimants being placed into the new system. However, the consequences of this move remain unclear.

Higher Education and Student Support

Labour's policies would increase the government subsidy to higher education by approximately £7 billion per year, assuming no changes in student numbers. The additional spending would primarily come from replacing loans with grants, benefiting the highest-earning graduates the most. Though low-earning graduates would have lower notional debt levels, their loan repayments would remain largely unaffected. However, the cost estimates provided by Labour might be conservative, as the combination of free tuition and uncapped student numbers could lead to further increases in taxpayer cost.

Labour has also promised to freeze per-student funding for universities until 2022, saving the government around £300 million. However, the fate of outstanding student debt and the specific details of these proposals remain unclear.

Universalizing Free Childcare and Early Years Staff

Labour's plans to offer 30 hours of free childcare for 2- to 4-year-olds during term-time would cost an estimated £2.6 billion in 2024. This represents an 80% increase in spending under current plans but is significantly less ambitious than the Liberal Democrats' proposal. The party intends to raise the minimum funding rate for 3- and 4-year-olds and provide additional subsidized hours of childcare for 2-, 3-, and 4-year-olds, with parents' payments varying based on income. However, the potential absence of caps on these additional hours and the recruitment of an additional 150,000 early years staff pose challenges to the feasibility of these plans.

School Spending and Health Care

Labour pledges to increase school spending in England by £10.5 billion in cash-terms by 2022-23, allowing for a 15% real-terms increase in spending per pupil over the next three years. These plans exceed the current government's proposals and would reverse the cuts in spending per pupil since 2009-10. In terms of health care, Labour's proposals for the NHS result in a slightly more generous average increase in day-to-day spending in England compared to other parties. However, it is essential to note that these are lower bound spending estimates, and actual spending might be higher.

In conclusion, the Labour Party's manifesto presents a vision for a substantial increase in the role of the state across various policy areas. While some of the proposed measures could address important societal challenges, it remains to be seen how feasible and efficient their implementation would be. Further analysis, including costings and comparisons with other manifestos, will provide a more comprehensive understanding of the implications of the Labour Party's proposals. Stay tuned for more insights from the Institute for Fiscal Studies in the coming weeks.

Labour Manifesto


Note: The content of this article is based on the original source provided by the Institute for Fiscal Studies (IFS).

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