Economics of Labour’s manifesto: sweeping ambition but modest resources

Labour’s election manifesto combined sweeping aspirations for national renewal with modest tax and spending measures, leaving a host of questions about how the party would boost UK growth and fix the public finances. 

Decrying 14 years of Conservative “chaos”, Sir Keir Starmer said his programme would usher in a period of political stability that would go far towards restoring business investment and economic growth, both of which have been anaemic. 

But while the Conservative manifesto vowed “bold” action to restore the economy via £17bn of tax cuts, Labour laid out a slimline list of tax measures that amounted to less than 0.5 per cent of GDP by 2028-29. 

Paul Johnson, director of the Institute for Fiscal Studies think-tank, described the manifesto as “aspirational and about the vibes”, but “microscopic” when it comes to specific tax and spending measures. 

“Delivering genuine change will almost certainly require putting actual resources on the table, and Labour’s manifesto offers no indication that there is a plan for where the money would come from to finance this,” he said.

Last month the IMF said the next UK government would face “pressing service delivery and investment needs” in the public sector, as it warned of a £30bn public funding gap. Analysts said Labour’s election prospectus offered few hints as to how it will meet demands for better public services without substantial tax-raising measures.

Labour’s revenue-raising measures, which include VAT and business rates on private school fees and further closing tax breaks for non-domiciled individuals, add up to £7.35bn by 2028-29, the manifesto said. Extending an existing windfall tax on oil and gas companies will add another £1.2bn.

The revenues will be deployed to boost NHS appointments, hire more teachers, and introduce breakfast clubs in primary schools. The party will additionally borrow £3.5bn a year to finance policies including setting up Great British Energy, to invest in renewables, as well as a national wealth fund and home insulation scheme. 

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The mooted tax measures are tiny when set against the totality of UK government receipts, which are on course to exceed £1.1tn this fiscal year.

The party has insisted it will not spring any “surprises” when it comes to tax policy, and has pledged not to raise income tax, national insurance, VAT or corporation tax. “It ties their hands enormously on the fiscal rules,” said Johnson. 

Labour’s policies require the government to borrow an extra £17.5bn over five years to pay for its green prosperity plan. But this leaves “literally no room” within Labour’s mooted fiscal rules for any extra public spending above existing government plans, the IFS said.

Its analysis of existing spending plans suggests that unprotected government departments like justice and home affairs face real-terms cuts of between 1.9 per cent to 3.5 per cent each year in the next parliament. 

Neville Hill, co-founder of consultancy Hybrid Economics, said that “make politics boring again” was likely to be a good pitch both to the electorate and the economy. But it would not be enough, he warned. 

“Growth based on a more stable policy environment would help the government finances, but it absolutely will not be enough to meet expectations for improved services,” he said. “There will need to be meaningful increases in taxes after the election.”

The manifesto showed Labour is banking heavily on changes to the planning system as one of the key drivers if the stronger growth it believes will help obviate the need for spending cuts if it wins the election. 

The reforms would speed up construction of infrastructure needed to underpin investment in the UK and increase housebuilding as a driver of productivity and labour mobility.

However, housebuilders expressed scepticism that Labour’s plans, including funding the appointment of 300 more planning officers, would really be transformative in removing the political barriers to signing off developments.

“More stringent housebuilding targets and a modest increase in planning officers is welcome but tweaking the current system isn’t enough, said Mark Booth, co-founder of Midlands-based housebuilder Hayfield Homes.  

As another leg of its growth strategy, Labour pledged to create a new Regulatory Innovation Office to co-ordinate regulators to speed up approval of innovative products and better harness the potential benefits of the AI revolution.

Andrew Bennett of Form Ventures, a venture capital fund that specialises in seed companies operating in areas with complex and novel regulations, said better co-ordination should make the UK the fastest place in the world to bring products to market.

But he added that investment would also be needed in order to address “the chronic underfunding” of regulatory innovation when set against the £15bn a year that the government spends on research and development.

“Many regulators have the right ambition but simply lack the resources,” he added.  

Giles Wilkes, a former adviser to Theresa May’s government, said Labour was putting too much weight on the potential to drive economic growth through an activist industrial strategy, but that giving businesses a stable environment for investment should not be underestimated.

“It sounds like a really empty thing — but it really has been terrible since 2015,” he said. “It’s lazy to imply that just not being the Tories is all you need. But it’s not demanding magic, just really hard work”.