The Labour Party Manifesto Analysed by the Institute of Fiscal Studies

LABOUR PARTY - Paul Johnson, IFS Director, said:

“The Labour Party manifesto offers a very substantial increase in the role of the state, one that is even larger than the big increase offered in their last manifesto. They estimate that their measures would push up day-to-day spending by £80 billion in 2023–24, which would be an almost 10% increase on what is currently planned. They estimate that their tax raising measures would bring in a similar sum, which if delivered would push the tax burden well above levels sustained in the UK since the Second World War. They also plan to increase investment spending by £55 billion a year, a doubling on current levels and even more than the substantial increases proposed by the Liberal Democrats and the Conservatives.

There are risks with both the proposed spending increases and the proposed tax rises.

It will be extremely hard simply to deliver anything like this scale of increase in capital spending, at least in the near-term, certainly in an efficient and cost effective way. If the intention really is to scrap Universal Credit and replace it with an entirely new benefit system then, as the last decade has shown, this would come with the risk of huge administrative complexity and costs. A particularly expensive commitment is on the state pension age. Rather than allowing it to rise as longevity increases, Labour wants to keep it at age 66, a very expensive pledge in the face of demographic change. This would add a projected £24 billion a year to spending by the 2050s. The commitment to abolish university tuition fees remains an expensive giveaway to the highest earning graduates and has the potential to make it difficult to maintain a system without a cap on student numbers.

On the tax side the proposals in the Labour manifesto represent an enormous increase in the amounts they want to raise from corporation tax. If their proposals did raise the sums they suggest then we would be raising more in corporation tax, as a fraction of national income, than any other country in the G7, and more than almost anywhere else in the OECD. This would clearly come with substantial risks. The truth is of course that in the end corporation tax is paid by workers, customers or shareholders so would affect many in the population. In the end, it is unlikely that one could raise the sums suggested by Labour from the tax policies they set out. If you want to transform the scale and scope of the state then you need to be clear that the tax increases required to do that will need to be widely shared rather than pretending that everything can be paid for by companies and the rich.”

Taxes

• Labour’s proposed income tax rise for those with incomes above £80,000 would affect only the highest-income 3% of adults. But this accounts for less than a tenth of the additional revenue Labour says it would raise.
• About three-quarters of the revenue comes from increasing taxes on companies and their shareholders. It would be a mistake to think of this as falling entirely on ‘the rich’.
• To the extent that corporation tax falls on company shareholders, that includes everyone with a defined contribution pension. And in practice much of the burden will be passed on to companies’ employees through lower wages, and customers through higher prices – and that means all of us.
• Labour proposes to raise the main rate of corporation tax to 26% and reintroduce a small profits rate at 21%. In terms of headline tax rate, that would move the UK from one of the lowest headline rates in the OECD to above average. Alongside other corporation tax increases proposed, this would move the UK from raising an average share of national income in corporation tax to the highest in the G7 (see chart below) – if the reform raises the revenue Labour hopes.
• In the short run, the increase in the rate of corporation tax might bring in the £20 billion Labour says. In the long run it would bring in less, as a less competitive rate would reduce investment, and therefore productivity and wages, in the UK.
• Labour’s proposed reforms to the taxation of capital gains and dividends could represent moves in the right direction; its proposal for a financial transactions tax much less so.

Stuart Adam, a senior research economist at the Institute for Fiscal Studies, said: “Labour claims its measures would raise £80 billion in 2023–24, with most of this coming from increasing taxes on companies and their shareholders. This would imply the UK raising more in corporation tax than any other G7 country. The biggest tax rise is an increase in corporation tax rates, which is unlikely to bring in as much revenue as Labour hopes, at least in the longer term. Increases in corporation tax would affect far more than the very rich: much of the burden would ultimately be felt by employees and customers.”

Total public spending

Ben Zaranko, a Research Economist at the IFS, said: “The Labour party manifesto includes plans for an £80 billion increase in day-to-day spending by 2023–24, along with an additional £55 billion of investment spending each year. The Liberal Democrats have promised something similar, albeit on a smaller scale: an extra £50 billion of day-to-day spending by 2024–25, with £26 billion per year of extra investment spending.

Both parties’ plans would mean a marked expansion in the size of the state and would represent a sharp break with the recent past. If we exclude the extraordinary period following the financial crisis, Labour's plans would take total government spending as a share of the economy to levels last seen in 1976–77 – and not previously sustained in the UK for any significant period of time.”

State pension age not increased beyond 66

Labour have said they would abandon the Conservatives' plans to raise the SPA, leaving it at 66.

Rowena Crawford, an associate director at IFS, said:

“Keeping the state pension age at 66 would be costly, potentially adding around £24 billion per year to the cost of state pensions by the late 2050s. This would be on top of the dramatic, £38 billion per year, increase in spending on state pensions projected even with the planned increase in the SPA to 69. Increasing the SPA is a coherent response to increases in life expectancy at older ages and would keep the average share of life spent in receipt of a state pension constant. Concerns about those unable to work at older ages, or groups who have shorter life expectancies, would be better addressed through more targeted policies.”

Working-age benefits

• Labour have pledged a significant giveaway in working-age benefit spending, enough to take the total benefits bill back to around its 2010 level.
• However, this money doesn’t go as far as it used to, because of underlying pressures pushing up benefits spending, including rising housing costs and a bigger population. Taking these into account, these pledges would only reverse around a quarter of discretionary cuts to benefits since 2010.
• None of the benefit increases are targeted specifically at those in work (though some will benefit both in- and out-of-work claimants), despite the focus on abolishing in-work poverty within 5 years. This is notable given that benefits are one of the few tools that can have a very large effect on in-work poverty in such a short time frame.
• The manifesto proposes stopping the moving over of existing benefit claimants onto Universal Credit – a process which, except in pilot form, has not started yet. However, new claimants to benefits – of whom there are about one million per year – will get put onto UC, rather than the existing benefits system. Unlike those that would be moved over from existing benefits, new claimants are not eligible for ‘transitional protection’. That means that many will see a lower entitlement than they would have got had the old system been in place – though a similar number will see a higher entitlement.
• Labour have committed to restoring the link between rents and housing benefit entitlement for private renters. Currently, a claimant’s maximum housing benefit entitlement is related to rents in their area in 2012, rather than in the present day. Restoring the link addresses bizarre – and increasingly common – situations where a claimant in a low rent area is entitled to more housing benefit than one in a high rent area

Tom Waters, a Research Economist at IFS said:

“The Labour manifesto promises a number of benefits giveaways, most of which are small individually but which add up to a substantial amount. While quite a few of these pledges would benefit those out-of-work, there are no giveaways targeted specifically at low income working households; perhaps surprising given Labour’s target to abolish in-work poverty within 5 years.

 The manifesto repeats an earlier promise to replace Universal Credit, though provides little detail on what the new system would look like. Assuming that the intention really is to replace UC with something fundamentally different – as opposed to, say, a rebranding exercise accompanied by small tweaks or a change to the amount spent on it – then this would effectively be a commitment to redesign the entire working-age means-tested benefit system for the second time in a decade. The administrative complexity and risks of once again moving millions of families onto a new benefit could be as great as the challenges that UC has already thrown up.”

Higher education

• Labour’s policies would increase the total government subsidy to higher education by around £7 billion per year, assuming no changes in student numbers. This is composed of £6bn for full-time standard undergraduate students, £500m for part-time students doing standard undergraduate degrees, and another £500m on students on courses below degree level.
• Almost all of this additional spending would come from replacing loans by grants, leaving total support for students during study unaffected. The highest-earning graduates would benefit the most from this, with loan repayments of the top third being reduced by around £50,000. Low earning graduates would graduate with lower notional debt levels but would be almost completely unaffected in terms of actual loan repayments.
• Our estimates of the cost of Labour’s plans are likely to be conservative, as the combination of completely free tuition with the current policy of having no cap on student numbers could see student numbers rise further. Bringing back student numbers caps, which were recently removed, could mitigate this problem, but this would likely harm access to university for poorer students.
• Labour’s plans to support lifelong learning could lead to a substantial further increase in taxpayer cost. Without tight regulation of the courses which are eligible for the scheme, the risk of fraud could also rise.
• Labour would also freeze per-student funding for universities at current levels until 2022. This would squeeze university finances but save around £300 million for the government.
• Several issues remain unclear, including what will happen to outstanding student debt, which Labour has suggested it would “deal with”. Writing off all student debt would cost around £70bn. Even if only tuition fee debt of post-2012 cohorts were written off, this would cost around £20bn.

Jack Britton, Senior Research Economist, at the IFS, said:

“The up-front cost to government of educating each cohort of 350,000 full time undergraduate students is currently around £17bn. Slightly more than half – about £9bn – of this cost is borne by students through the loans they will repay and the rest by the taxpayer, largely as a result of loans that will not be repaid. Labour’s plans will largely benefit students with the highest earnings and those wealthy enough to pay their fees upfront. If student numbers stay constant, they will cost the taxpayer £7bn per year. But it is plausible that student numbers would increase, and hence student number caps may have to be re-introduced to avoid costs rising in an uncontrolled fashion.”

Universalising free childcare and hiring 40% more early years staff

• We estimate that Labour’s plans to offer 30 hours’ free childcare during term-time for all 2- to 4-year-olds would cost £2.6 billion in 2024 (in today’s prices), before any spending on additional subsidised childcare hours. This would be an 80% increase on spending under current plans. This is much smaller than the 350% increase promised in yesterday’s Liberal Democrat manifesto, but would still represent one of the biggest five-year increases in the history of free childcare spending in England. Labour’s own costings suggest the party is prepared to spend even more, mostly because they expect higher take-up rates.
• While its overall package is much less generous than the Liberal Democrats’, one area where Labour intends to spend more is on per-hour funding. Raising the minimum funding rate for 3- and 4-year-olds to £5.60 (in 2024 prices), as the party has previously promised, would affect around five-sixths of local authorities. Promised funding for 2-year-olds, at £9.00 an hour, would boost funding in the average local authority by £3.45 in 2024.
• The Labour party is also promising “additional subsidised hours” of childcare for 2-, 3- and 4-year-olds, with parents’ payments depending on income. One key question is whether these additional hours will be capped – if not, the Labour party could find that many children use more than the 60 hours a year that they have costed for. An uncapped subsidy programme would also mean that childcare prices for this age group are set by Whitehall.
• Labour has also announced its plans to “recruit nearly 150,000 additional early years staff.” There are currently around 360,000 staff in the childcare sector; boosting their numbers by more than 40% will be a major challenge, especially given Labour’s plans to transition simultaneously to a better-qualified childcare workforce.
• Like the Liberal Democrats, Labour is promising to spend an extra £1 billion to reverse cuts to Sure Start funding since 2010. The party plans to expand the number of centres to “provide a genuinely universal service,” though research suggests that Sure Start’s benefits – at least for children’s health – are strongest in the most disadvantaged neighbourhoods.

Christine Farquharson, a Research Economist at IFS, said: 

“Coming on the tail of yesterday’s childcare spending announcement by the Liberal Democrats, Labour’s plans for an extra £2.6 billion (in today’s prices) of free childcare spending in 2024 might seem less ambitious than they really are. But the party’s proposals would still represent one of the biggest giveaways in the history of England’s free childcare programme, providing universal, funded, full-time childcare to all 2- to 4-year-olds. One big challenge for the party would be fulfilling its promise to recruit another 150,000 early years staff – a 40% increase on current numbers – while raising the level of qualifications in the workforce at the same time.”

School spending

Today, Labour have committed to increasing school spending in England by £10.5 billion in cash-terms by 2022–23 as compared with today. This would represent a real-terms increase of £7.5 billion in today’s money and would allow for a 15% real-terms increase in spending per pupil over the next 3 years.

These spending plans are higher than current government plans for a £7.1 billion cash-terms rise by 2022–23 and Liberal Democrat plans for a £7.6 billion rise over the same period. Both these plans would effectively reverse cuts in spending per pupil of 8% since 2009–10, but would still leave spending per pupil about the same-level in 2022–23 as it was in 2009–10. In contrast, Labour plans would leave spending per pupil about 6% higher in real-terms than in 2022–23.

Luke Sibieta, Research Fellow at IFS, said:

“All the main parties now seem committed to delivering large increases in school spending over the next few years. The Liberal Democrats are committed to a slightly larger increase than current government plans, though both would effectively reverse cuts of 8% in spending per pupil over the last decade. Labour would go further still, with a 15% real-terms rise in spending per pupil over the next 3 years.”

Health care

NHS spending

George Stoye, a Senior Research Economist at the IFS said:

“The three largest parties in England are all proposing increases to health spending. Today’s proposals from Labour would increase day-to-day NHS spending in England by an average of 3.8% per year between 2019–20 and 2023–24, ever so slightly more generous than the 3.7% proposed by the Liberal Democrats, and above the 3.2% set out by current government plans for this period. Of course, history teaches us that these plans are apt to be topped up, and should be seen as a lower bound for what will eventually be spent.

Both Labour and Liberal Democrat plans include extra money for other day-to-day health spending in England and for capital investment. Taking this into account alongside the additional funding for NHS England, overall spending on the Department of Health and Social Care would increase on average by 4.3% per year between now and 2023–24 under Labour’s plans. This compares to 3.8% under Liberal Democrat plans. Current government plans do not cover these wider components of health spending and therefore cannot be compared on a like-for-like basis.”

Prescription charges

Ben Zaranko, a Research Economist at the IFS said:

"Labour’s manifesto includes a £600 million promise to scrap prescription charges in England. Broadly speaking, the old, the young, the poor, the disabled and the chronically sick are already exempt from charges: as a result 89% of prescriptions last year were provided free. The main beneficiaries of Labour’s policy to make the remaining 11% free of charge are therefore likely to be working-age people of reasonable financial means, and who are not chronically sick."

Social Care

Polly Simpson, a Research Economist at the IFS said:

“As is well documented, there are widespread issues with the existing system of social care funding. Despite many suggested reforms that would deal with some of these issues – including free personal care and a cap of lifetime costs – none have been implemented as yet.

Labour have today set out their plans to address these key issues. In the short run they have promised additional funding for the existing system and the introduction of free personal care for those aged 65 and over. They have estimated that this would cost a combined £10.8 billion in 2023/14. This would be a very substantial increase in funding for adult social care, compared to current spending in England of around £18 billion per year.

In the longer term, they offer a £100,000 lifetime cap on all other care expenditures but do not provide details of what would be covered by the cap, or the additional funding required to cover the cost of the cap.”

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