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Boxing clever, by Tony Travers

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15 April 2005

As the 2005 election's battle of the budgets hots up – with accusations of tax and spend black holes flying to and fro – Tony Travers asks whether it's still the economy that will determine the outcome. Or are other issues winning hearts and minds?

The 2005 general election is turning into a struggle over a limited patch of ideological territory. Vote Labour and public spending will level out at about 42% of GDP. Taxes will rise over the coming years to fund this total. The Conservatives are committed to a modest reduction in the tax and spend burden, while matching Labour's spending totals for health and education. The Liberal Democrats would push tax and spending up slightly compared with Labour's position.

So there is political space between the parties, though rather less than would have been the case in the more divisive of recent elections, for example, in 1983. In that contest, Margaret Thatcher was still promising to 'roll back the frontiers of the state', while Michael Foot was committed, among many other things, to raising public borrowing, redistributing wealth and boosting all aspects of public expenditure.

Elections since 1997 have seen a significant narrowing of the gap between Labour and the Conservatives. During this time, the Liberal Democrats have moved just to the left of Labour in terms of traditionally defined tax and spend policies.

Labour has tried hard in the first ten days of this election campaign to stress the importance of the economy and public services. Chancellor Gordon Brown has been pushed back into the limelight while the prime minister, like Trotsky, has been cut out of official photographs. The 'battle of the budgets' between the main parties – complete with accusations of tax and spend black holes – has intensified by the day.

There is no doubt that opinion polls show Labour ahead of the Conservatives on the economy and public services, while law & order and immigration are the Tories' trump cards. Each of the major parties will push 'their' issues hardest.

Until very recently, the success or failure of the UK economy was seen as a major element in determining whether a government would be likely to be re-elected on polling day. Certainly, administrations with damaged reputations for economic management – such as James Callaghan's and John Major's – had little chance of convincing the electorate to vote for them. Equally, buoyant economic growth coupled with a reputation for economic competence helped both Margaret Thatcher and Tony Blair get re-elected.

But, after more than a decade of economic growth, has the economy disappeared as a political issue, with the public now confident that inflation has finally been killed off and unemployment is no longer a threat? Indeed, has the post-2000 jump in public spending on health and education made it possible for people to relax about that issue too?

The arrival of issues such as immigration, 'yob culture', gypsies, MRSA and even abortion on the political agenda suggests that old favourites such as the economy, the NHS and schools might have receded from the public's mind. Has Michael Howard's Australian dog-whistler managed to transform British politics in just six months?

In truth, we will have to wait until the early hours of May 6 to know the answer to this question. It is indeed possible that Lynton Crosby has noticed something about Britain that we long-term residents had failed to work out. Opinion poll results suggest that Crosby's brand of short, sharp appeals to the electorate might have an impact. Moreover, there are many Left-leaning voters who appear determined to turn out against Tony Blair on the single issue of the Iraq war. That, too, is a one-off concern well removed from the traditional list of vote-drivers.

Elsewhere in the mass of analysis and statistics that are already building up, the Guardian's pollsters, ICM, launched their election coverage with a question about which issues will be most important in determining how people vote next month. The results are shown opposite.

These suggest that voters have not moved fully away from their traditional interests of health, education and law & order, but the economy has slipped well down this list of concerns. This indicates that as successive Conservative and Labour governments have managed to deliver an unbroken period of expansion, so the electorate has become less concerned about economic growth and unemployment. Polling undertaken in advance of the 1992 general election had the economy as the second most important issue, with law & order well down the list of concerns. 'Asylum and immigration' did not even feature.

So, Tory strategists have done their homework. Things are different. The public services now have competition from other issues when it comes to determining how people vote. In the longer term, this shift might have profound implications for politicians' willingness to devote ever-larger shares of a limited total of public expenditure to the NHS and schools. Indeed, looking at Labour's 2004 Spending Review, the early indications of a flight from recent funding patterns can be seen, particularly for education. Real-terms education expenditure increased by 7%–8% a year between 1999/2000 and 2005/06. The equivalent annual average for 2005/06 to 2007/08 is just under 4%. Overall public expenditure shows a very similar pattern of change in these periods.

Gordon Brown's decision to 'top out' public expenditure at about 42% of GDP during the years from 2005/06 to 2007/08 will mean significantly slower growth for many services than in the period since 1999/2000. If there were to be an economic downturn, there would be pressure for even lower spending. The Conservatives are pledged to follow Brown's plans for the NHS and education, but could presumably impose even lower growth on other public provision. The recently sacked Howard Flight and his Arundel successor Nick Herbert appear to believe that a Tory government should be more radical in cutting taxation and public spending.

It is just possible that the British electorate is signalling – as it did in the elections of 1945, 1979 and 1997 – that it wants a change of gear in relation to public expenditure and taxation. The perennial struggle over council tax suggests there is little propensity for voters to pay any easily perceived taxation. As the overall tax burden starts to catch up with the post-2000 splurge of public expenditure, it is surely likely that the debate about tax will intensify. Whichever party wins the election, there will have to be real rises in the tax yield.

If the British really don't want their tax burden to grow beyond its 2005 level, public services face a return to the kind of – smaller – spending increases delivered by the Major government. That is, with overall expenditure at best rising in line with real growth in the economy – although not in every year. Such a move would be perplexing for services that have enjoyed huge windfalls in the past five years. For many hospitals, schools, police forces and public transport systems, lower growth could easily be mistaken for 'cuts'. And, of course, there might be some genuine cuts.

The result of the general election will have a real impact on the tax yield. The Conservatives would, because of their (albeit modest) promise to reduce taxes immediately by £4bn, have to trim Labour's overall public spending plans, either by achieving David James's efficiency savings or by some other means. The Liberal Democrats have a commitment to increase the tax paid by higher earners, although they have also made clear that they will spend the whole of the £4bn–£5bn additional yield.

Thus, similar pressures to trim the rate of increase in spending would bear down as much on a LibDem-influenced government as it would on a Labour or Conservative one. The overall spread between Conservative, Labour and Liberal Democrat tax and spending proposals is thus about £8bn–£9bn on either side of Labour's spending plans of about £520bn for 2005/06, with the Tories coming in £4bn below Labour and the Liberal Democrats £4bn–£5bn above.

It was always inevitable that Labour's post-2000 increases in spending on major services would eventually have to be moderated. Brown's hard-won reputation for prudence has been threatened by the recent suggestion that public expenditure has increased so far and so fast that he has tottered on the brink of failing to meet his famous 'golden rule'. Any future chancellor would find it virtually impossible to meet this, or an equivalent, rule if public spending increases were not kept in line with Spending Review 2004 limits. The economy would also need to continue to grow at least in line with Labour's forecasts.

As the election campaign progresses, there have been claims and counter-claims about the efficacy of the additional resources going into public services. Early on, the chief constable of North Wales allowed himself to be drawn into politics by attacking the Conservatives' claims about rising crime. Labour, for its part, has been parading an array of statistics about extra police officers, teachers and nurses. What remains difficult to assess is how far the public believes that the NHS, schools and other services have delivered value for the additional Blair-Brown billions.

The productivity – or lack of it – of recent public spending increases is an old favourite for Public Finance readers. It has become almost impossible to judge whether official statistics about crime, hospital waiting lists, asylum seekers or a range of other topics tell us very much about the use to which additional spending has been put. The figures are so politically contested they have become virtually meaningless. As a result, when the public cast their votes, they might have to rely on personal experience to assess public service quality.

There might also be a political struggle over other tax and spend questions, such as the use of tax credits. Chancellor Gordon Brown has been a particular fan of this instrument, seeing it as a way of providing incentives for people to move back into work and at the same time assisting in Labour's efforts at redistribution by stealth. Many Conservatives see tax credits as an example of meddlesome over-government. There is no doubt Labour has seen fit to intervene throughout the public sector in an effort to steer it towards an array of objectives, including guiding the unemployed back to work, a 'fairer' allocation of university places, and, most recently, better eating habits in schools. To nanny or not to nanny, that is the question.

The fact is, that in a country where more than 40% of the economy is consumed by the public sector, every election will to a significant extent be about the use of those resources. The pressure for 'delivery' will be intense because most countries that deliver a full welfare state have at least 50% of their economy within the public sector. It is clear that British taxpayers are unwilling (or politicians judge they are not willing) to pay the additional tax necessary to finance public expenditure on the scale of France or Sweden. But the UK electorate still wants the pensions, hospitals, schools and railways that these high-tax countries deliver.

The reach of the British state's '42%' has extended far further under Labour than before. By increasing the use of private companies and consultants in the delivery of most public services, the government has created a new sector of para-statal corporations whose main business is bidding for contracts and then providing services. The centralisation of British public life has been given a new, corporate, twist.

The Labour Party proposes higher taxes and public spending than the Conservatives. The Liberal Democrats offer a bit more tax and spend than Labour. Everyone promises to be more efficient and effective. When they enter polling stations on May 5, voters will, as the prime minister said when he announced the election, be 'the boss'. The 2005 election does offer a real choice. Happily, all British elections do.

Tony Travers is the director of the Greater London Group at the London School of Economics

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