Nick Clegg has got the headlines he wanted today. The Liberal Democrats are sticking to the course of fiscal prudence and he’s seen off the social democrats in his ranks who wanted a different strategy.
Looking at the fine print, however, the party seems to have signed up to a contradictory, and probably undeliverable, set of fiscal commitments today. The centrepiece of its tax plans is the commitment to increase the personal tax allowance (PTA) to an income level equivalent to full-time employment on the national minimum wage during the next parliament. In today’s money that would be £12,300.
The PTA will be £10,000 a year from April 2014. For argument’s sake, let’s say that inflation rises by 2.5 per cent a year until the end of the next parliament. That would take the PTA to £11,314. Let’s also say that full time employment on the national minimum wage has gone up a little by the time of the next election in 2015 to £12,500 a year – a figure often cited by Danny Alexander, the chief secretary to the Treasury. That leaves a discretionary increase in the PTA of £1,186 needed to lift the full-time worker on the minimum wage out of tax. That’s expensive: in 2015/16 it would cost £7.7 billion or closer to £9 billion by 2019/20.
But notice that this calculation leaves the minimum wage at 2015/16 levels. If the Lib-Dem pledge means that the by the end of the parliament the PTA is equivalent to whatever the level of the minimum wage is for a standard full-time worker, then it will be a lot higher than £12,500. If it rises with RPI, for example, based on the OBR’s forecasts it could reach £14,900 in 2019/20. Cue more billions.
That might be considered an expensive but worthwhile pledge (even though it will do nothing for those too poor to pay that level of tax – but that’s another story). But the Liberal Democrats also signed up to sticking with the existing path of fiscal consolidation. This requires the government to cut departmental public spending by £25 billion in real terms between 2015/16 and 2017/18. Now, Clegg today said he did not want to reduce the deficit ‘100 per cent’ by spending cuts (the actual figure for the next parliament is 98 per cent). But on the tax and spend plans agreed today, he’s just loaded billions more pressure onto public spending cuts.
Does a mansion tax spring the trap? No. A tax worth 1 per cent of the excess value of a residential property over £2 million raises about £2 billion – nothing like enough to close the fiscal gap opened up today by the party. Hand-waving about tax avoidance won’t do it either.
At the same time as all this, the Liberal Democrats have set out ambitious and bold childcare plans, which would significantly extend entitlements for families. These are well thought through and make a lot of sense. But they are expensive. At the 2010 election, childcare lost out to tax allowances when the Liberal Democrats chose their priorities. At this rate, the same will happen again in 2015. Now that really would be a defeat for the party’s social democrats.