Jeremy Corbyn and Boris Johnson Are Spending Like Crazy

(Bloomberg Opinion) -- For much of the past three and a half years, Britain’s main political parties have struggled to express a clear plan for how the U.K. should leave the European Union. A new report shows they’re just as clueless about managing the public finances.

The Resolution Foundation think tank has looked at how the size and shape of the British state would change if the Conservatives or Labour were to win December’s general election. The two parties are yet to present their manifestos but they’ve both made significant policy announcements over the past few years that give a sense of where they’re headed — and there may be more details on their borrowing plans on Thursday.

The most eye-catching finding of the report is just how much both the Tories and Labour would hike public spending, reversing a decade of Conservative-led austerity. Regrettably, neither has explained how they mean to pay for their generosity and for the inevitable demands of an ageing society.

U.K. state spending has fallen from a peak of 46.6% of gross domestic product in the early 2010s to just above 40% under current plans, but this trend is set to reverse, whoever wins in December.

Sajid Javid, Chancellor of the Exchequer, has emphasized the need for much more spending on infrastructure, including a 100 billion pound ($129 billion) multi-year “National Infrastructure Fund.” According to the Resolution Foundation, this and other spending plans announced so far by the Conservatives would lift total managed expenditure in the UK to 41.3% of GDP by 2023-24.

Meanwhile, the Labour Party included in its last election manifesto in 2017 pledges totaling 48.6 billion pounds of extra day-to-day spending and 25 billion pounds of extra infrastructure spending. The report calculates that this would increase state expenditure to 43.3% of GDP, well above the 1970s average. In fact, this might be a prudent estimate. According to the Financial Times, shadow chancellor John McDonnell is planning to announce that Labour would more than double its borrowing commitments for extra capital spending to 55 billion pounds a year. 

Of course, even these higher levels would be hardly unique in the world. U.K. outlays as a share of GDP are below the OECD average. France, Italy and other countries have much bigger states. In any case, the size of Leviathan is a central question for public policy. It’s entirely legitimate that political parties want a larger role for the public sector.

There are, however, two unresolved issues that Labour and the Tories should be much more transparent about. The first is how they’ll fund their promises and what fiscal rule (if any) they’d follow to make sure public finances are kept in good order.

On top of Javid’s spending plans, the Conservatives have made wild promises of tax cuts. Prime Minister Boris Johnson says he wants to raise the threshold on when people start paying the higher level of income tax from 50,000 pounds to 80,000 pounds.

At least Labour is more open about the need to raise taxes (or soak the rich) to pay for its largess. Yet it needs to explain what fiscal rules it intends to follow, especially with regard to the national debt. The existing rule says net public debt as a percentage of GDP should fall by 2020-21, but it will be very hard for either party to respect that ambition.

The second problem concerns how spending is targeted and its impact across generations. The Resolution Foundation finds that austerity has hit different parts of government in very different ways. For example, the share of spending by the Department for Health and Social care has risen this decade from 31% to 40%. Between 2007-8 and 2023-4, spending on pensioner social security is set to have increased by 21.4%, while the rest of the population will only have enjoyed a 3.5% rise in similar welfare spending.

Like much of Europe, the U.K.’s ageing population means spending on healthcare and pensions is destined to keep increasing. The political parties must explain whether they intend to pay for this through higher taxes or more borrowing — or whether they’ll limit its expansion.

For now, Labour and the Tories are a long way from providing clear answers. The Conservatives’ bruising experience over the so-called “dementia tax” in their last manifesto will encourage everyone to tread carefully. But voters need both parties to come clean about how they’ll tackle the demographic time bomb.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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