Spencer Thompson has picked apart the conference announcements of Labour, the Conservatives and the Lib Dems - so which party will benefit whom?
Spencer Thompson has picked apart the conference announcements of Labour, the Conservatives and the Lib Dems – so which party will benefit whom?
Now that the conference season is over, we can reflect on what was actually announced by the three main political parties.
All face a variation on the same challenge: given their plans for fiscal retrenchment in the next Parliament (a stance all three share), how can they navigate from here to the general election with a credible strategy for deficit reduction while also starting to outline their general election offers to voters?
Labour
Labour’s fiscal stance is to reach a surplus on the current budget as soon as possible in the next Parliament, while protecting the entirety of the capital budget. Depending on how fast they intend to reach a surplus, this means Labour has to raise between £3.6bn and £28bn through a combination of cuts to departmental spending, cuts to welfare and tax rises.
Even taking the lower of those figures, the policies announced at their conference amount to a very small proportion of the resources needed. The Shadow Chancellor Ed Balls identified £400m of savings through limiting child benefit rises to 1 per cent over the first two years of the next parliament. But since the current Coalition plan is for 1 per cent up-rating in year one, this only amounts to a single extra year. This implies that on a per year basis (the appropriate way to consider savings) this policy will only bring in around £100m.
Labour also plans to abolish the Married Couples’ Tax Allowance, saving over half a billion from 2015/16. But they are re-investing the money raised into the creation of a 10 pence band on income tax, meaning no net contribution to their deficit reduction program. Labour also re-iterated a commitment to a Mansion Tax, which could raise £1.2bn, and a one-off Bankers Bonus Tax.
Again, neither of these measures would contribute to deficit reduction, with the Mansion Tax money earmarked for the NHS and the Bankers Bonus revenue diverted towards several policies, including a youth jobs guarantee.
Finally, Labour are also committed to reversing the 2013 cut in the top rate of income tax, restoring it back to its prior rate of 50 per cent. The money that could potentially be raised from both the banker’s bonus tax and the top rate of income tax is highly uncertain, as behavioural effects such as the timing of bonuses will prove important.
Conservatives
The Conservative party has a much tougher fiscal stance than the Labour party. They are not protecting capital spending and are therefore seeking a surplus on the overall budget rather than just current spending. To get there they aim to reach a surplus of £1bn by 2018-19.
Despite their plans for a more severe trajectory of deficit reduction, they announced two new tax cut commitments. They matched the Liberal Democrats £12,500 Personal Allowance pledge (which costs £5.6bn) and also plan to increase the Higher Rate Threshold (the level of income before paying the 40p Income Tax rate) to £50,000. This adds £1.6bn to the cost.
They did not fully fund these two tax cuts through their other announcements, identifying £3.2bn of savings from a two-year freeze of working-age benefits. The party’s other saving, from a reduction in the benefit cap from £25,000 a year to £23,000, is being used to fund an expansion of apprenticeships and so makes no net contribution. The assumption should therefore be that the tax cuts will be funded by further reductions in welfare spending and departmental budgets, rather than rises in other taxes, which the Conservatives have ruled out.
Finally, the Conservatives have announced the abolition of the 55 per cent tax on defined contribution pension savings upon death, costing £150m. And after the end of the conference season, they also mooted an increase in the inheritance tax threshold to £1m from it’s current level of £650,000 for a married couple (£350,000 otherwise). While the cost of such a move has not been calculated, given that fewer than 3 per cent of estates in 2011-12 were valued at over £1m and the tax currently raises £3.5bn a year, this could prove very expensive.
Taken together, these announcements leave the Conservatives with a bigger job to do on deficit reduction than they had at the beginning of the conference season.
Liberal Democrats
The Liberal Democrats are in between the other two parties. Similarly to Labour, they plan to reach a current budget surplus in the next parliament. While They will also exclude some capital spending, it will although only be an unspecified proportion, not the full amount. In addition, they have specified the year they will reach a fiscal surplus, hoping to balance the books at some point during the 2017-18 financial year.
While this means the Liberal Democrats are in a similar position to Labour, albeit with a faster pace of deficit reduction, they are also committed to an expensive rise in the Personal Allowance; They plan to raise the earnings threshold before income tax is payable from £10,500 to £12,500 over the next parliament. Estimates put the cost of such a move at around £5.6bn.
The Lib Dems have identified funding for the first round of this tax cut. A combination of an increased rate of Capital Gains Tax, a reduction in the Capital Gains Income Allowance and a further ‘crackdown on tax avoidance’ will, they claim, bring in £1.5bn. This should be enough to fund a rise in the Personal Allowance to £11,000, although it is unclear how they will then move to £12,500.
Finally, the Liberal Democrats are also committed to a tax on property, similar to Labour’s proposal for a mansion tax. They will introduce a ‘High Value Property Levy’ by re-valuing homes in the top band of council tax and introducing an additional rate for those valued over a £2m threshold. In practice, if the rate is set at the same rate as Labour’s mansion tax, 1 per cent, this is likely to have the same effect and raise a similar amount of money as Labour’s proposal.
Distributional implications
One important consideration of all policy announcements is the effect they will have at different points in the income distribution. This is especially important when we are talking about significant cuts to welfare and to taxes. Using the IPPR Tax-Benefit Model, we have modelled the distributional implications of the policy measures set out above, looking at their impact in 2020/21, the final year of the next Parliament.
Not included are the announced wealth tax rises and some cuts, other than the mansion tax. Wealth taxes are difficult to model due to the lack of robust data on individual’s wealth holdings over time. Last year, colleagues at IPPR published a paper that discusses these challenges and presents some initial attempts to model the distributional implications of several taxes on wealth, using the first wave of the Wealth and Assets Survey. Results underlying that publication have been used in the charts below to assess the impact of the mansion tax. The wealth taxes we have not modelled, such as the Liberal Democrats plans for a higher rate of capital gains tax, are likely to affect the top of the income distribution only.
Similarly, our model does not allow us to separate out the work-related activity group within Employment Support Allowance, or to modify the local housing allowance within housing benefit, both of which are affected by the Conservatives freeze on working-age welfare.
The graph below shows the impact of the packages of the three parties, calculated as the average percentage change in annual income for households in each decile of the income distribution.
Distributional impact of changes to taxes and benefits announced during the 2014 party conference season – average effect on annual net income by equivalised household income (before housing costs) decile (%)
Source: IPPR Tax-Benefit Model and IPPR Wealth Model
Note: does not include wealth taxes outside the mansion tax, the impact of the banker’s bonus tax, or the two-year freeze in Work-Related Activity Group Employment Support Allowance and the Local Housing Allowance component of Housing Benefit. Labour 10p tax band set as £500 and up-rated to 2020 value. Mansion tax impact is assumed to be the same for the Liberal Democrats and Labour, and is taken from earlier work using the IPPR wealth model and does not include Labour’s plan to defer payment for those on low incomes.
We have also modelled these changes in cash terms. The graph below shows the impact of the packages of the three parties, calculated as the average change in annual income, expressed in 2014/15 prices, for households in each decile of the income distribution.
Distributional impact of changes to taxes and benefits announced during the 2014 party conference season – average effect on annual net income by equivalised household income (before housing costs) decile (2014/15 £)
Source: IPPR Tax-Benefit Model and IPPR Wealth Model
Note: does not include wealth taxes outside the mansion tax, the impact of the banker’s bonus tax, or the two-year freeze in Work-Related Activity Group Employment Support Allowance and the Local Housing Allowance component of Housing Benefit. Labour 10p tax band set as £500 and up-rated to 2020 value. Mansion tax impact is assumed to be the same for the Liberal Democrats and Labour, and is taken from earlier work using the IPPR wealth model and does not include Labour’s plan to defer payment for those on low incomes.
The Conservative Party’s announcements will have a significant impact on the poorest families, as tax credits and benefits make up a larger share of those families’ incomes. This same group does not gain from the tax cuts; they are less likely to earn enough to pay income tax in the first place, and if they do pay tax will tend to have a single earner, meaning the increase in the Personal Allowance generates a smaller benefit. Those families at the top of the income distribution are paying the most income tax and are more likely to be earning above the higher rate threshold, and therefore will benefit from an above-inflation rise in both the Higher Rate Threshold and the Personal Allowance.
The Liberal Democrat package has a similar shape, without the gain to high earners from a rise in the higher rate threshold. Those in the middle of the income distribution tend to benefit more from the Lib Dems policies, gaining between one and two hundred pounds a year from a rise in the Personal Allowance, without facing a freeze in their child benefit or Universal Credit. Those on the very highest incomes face a hit to their income from a mansion tax, although this is attenuated by the extra income many (but not all) will receive from a higher personal allowance.
On the whole, Labour’s policies have a much smaller impact. This is mainly because the changes announced by the party are small in comparison to those announced by the other parties. Still, a 10p band on income tax does put extra resources in the pockets of those in the 8th and 9th deciles, whereas those towards the bottom lose more in lost child benefit income than they would gain from a 10p band. Bear in mind we are talking about £10 or £20 a year, rather than hundreds of pounds. The mansion tax and 50p income tax rate will, however, have a big impact on those with the highest incomes, seeing the top 10 per cent losing over £1,000 a year.
It’s important to note that tax and benefit policies are only one set of levers among many used by governments to tackle social challenges. Others include the provision of services such as childcare, schools and the NHS, as well as employment policy and many other policy instruments. We should not therefore judge the success of a government, or the quality of a particular party’s announcements, solely on the basis of charts like those shown above. They are a very important part of the picture, however, and should be considered as part of a broader picture of social investments decisions by government.
But with all three parties committed to a course of deficit reduction in the next Parliament, it is surely incumbent on them to let us know where they are planning to cut spending and what taxes they intend to increase. Between now and the election they need to spell out in much more detail their plans.
Spencer Thompson is a senior economic analyst at IPPR
62 Responses to “Exclusive: Do the party conference tax announcements stack up?”
timeroy
IF YOU HAVE NO INTEREST IN MY COMMENTS
STOP YOUR MOUTHING O.K.
BYE IDIOT
The_Average_Joe_UK
.