Since the party manifestoes have been published I have been trying to work the numbers again to predict the effect of the economic policies for Labour the Conservatives and UKIP.
I really didn’t take seriously those of the Liberals or the SNP or Plaid Cymru or the Greens. No one would believe the resulting escalation of deficit and debt reminiscent of the fantasy global warming hockey stick graph.
The SNP, Plaid Cymru, and Green party leaders revealed in the opposition leaders debate last Thursday, 16th April 2015, that they have no idea the cause of the deficit. They all gave lip service to ‘of course we will bring down the deficit’ but all wanted to ramp up public expenditure.
All their intentions to hit the rich with punitive taxation and to do away with vital military expenditure would somehow solve the nations finances. They all talked of investing in the disastrous state of the National Health Service, though expenditure on the Scottish and Welsh services is already in the hands of the devolved governments.
They and Labour believe in ‘investing’ in public services. The term investing is about putting money into something to realise a profit. By definition you cannot invest in a service that consumes money and does not produce a profit.
Leanne Wood of Plaid Cymru even spelt out to us ignorant of economic affairs how spending money on public services produces tax revenue and keeps the economy running. With total taxation being only a proportion of gross income you don’t get it all back and a fair amount is spent on fuel and products from outside the UK, so it is what is known as a law of diminishing returns.
A guest economist on a TV news programme last week revealed that never, ever has a government been able to achieve more tax revenue than 37% of Gross Domestic Product (GDP). The present level of 34% is quite close to the limit and attempts to get more tax will again result in a law of diminishing returns in relation of effort to raise it.
Trying to work out which of Labour, Conservative, or UKIP has the best financial policies in respect of providing services and infrastructure during the next parliament and the state of the economy in 2020 is like trying to hit a moving target. The more desperate the two major parties are as the days tick by, the more unbelievable are their offers.
I have assumed that Labour will somehow manage to squeeze a further £5billion (£5bn) of taxation from the mansion tax and that really is as much as is realistic. Both Conservatives and Labour are to sell the Lloyds bank shares, though my calculations put the value at £11.5bn while the Sunday Mail (19th April 2015) put the figure at £4bn.
Strangely the Labour party offers to give an extra £2.5bn to the NHS in 2016 then review the situation. Actually if they do nothing else they will then be committed to that addition plus inflation. The Conservatives have pledged to give an additional £11.5bn to the NHS by the end of the parliament. Actually just increasing the numerical spending by 2% per annum in line with inflation produces the same result so is no increase in real terms.
UKIP pledges to increase spending on NHS and the military in real terms by £3bn each, which is more that the Conservatives on the NHS and more than anyone else on the military.
UKIP doesn’t even pretend to have a government funded house-building program whilst Labour pledges 200,000 per annum and the Tories 500,000 by the end of parliament.
While the others all support HS2 at a cost of around £10bn per annum starting in 2016, UKIP will scrap the project as well as getting us out of the EU, stopping any new renewables subsidies, and reducing overseas aid dramatically.
The accompanying Profit and Loss Account for the UK PLC at 2020 reveals that according to manifest pledges the deficit will be £164.5bn with Labour, £141.6bn with the Conservatives, and £82.8bn with UKIP even with its £42bn a year reduction of public expenditure.
The last Labour government ramped up public expenditure to levels beyond the ability to pay for it within the 37% practical limit of tax revenue. Even selling back government shares in Lloyds and RBS will not solve the problem that public expenditure remains too high. Increasing the public expenditure further will only increase the deficit, not reduce it.
The recent Conservative government was unable to clear the deficit and only reduced it from £158.9bn to £97.1bn and now intends to add on 100,000 homes a year plus HS2 and there is simply nowhere for them to make cuts of £30bn per annum. With many other expenses beyond their control they cannot clear the deficit by 2019 as promised in the manifesto.
Though it is a near impossibility that UKIP will have a major impact on expenditure in the next government, even coming out of the EU, disbanding the Department of Energy & Climate Change, reducing Overseas Aid, and scrapping HS2, does not clear the deficit.
Pension expenditure is likely to continue to increase at about 5% per annum until 2029 and then steadily fall over 5 years to inline with inflation. There is nothing anyone can do about that as it is related to the numbers of the baby-boom generation becoming pensioners in relation to the number of people of working age who support them through taxation.
Healthcare cannot be allowed to get an ever-higher proportion of tax revenue and other government income because is leaves a lower proportion for all other government departments. A figure of 20% of government income would be a good upper limit.
A cap on universal credit will ensure the Welfare budget does not escalate significantly while all other departments will also need to be significantly trimmed. The deficit must be cleared and the economy must be run with a budget surplus to eat into the total debt. Only then will the annual interest payments start to fall and any government then be in a position to reduce taxation and/or make infrastructure investment. That’s the truth!