Labour and LibDem spending plans ‘will deliver short-term economic boost’

9 Feb 15
Both Labour and Liberal Democrat spending plans in the next parliament would provide a short-term boost to growth due to the proposals to borrow to pay for infrastructure development, an economic think-tank has found.

By Richard Johnstone | 9 February 2015

Both Labour and Liberal Democrat spending plans in the next parliament would provide a short-term boost to growth due to the proposals to borrow to pay for infrastructure development, an economic think-tank has found.

The National Institute of Economic and Social Research‘s analysis of party spending platforms found that Labour and the LibDems’ proposals would both lead to a 0.3 percentage point increase in gross domestic product in 2017, followed by 0.2 points in 2018 and 0.5 in 2019.

Labour has pledged to balance the public sector's current budget in the next parliament, while the LibDems said they would run a balanced cyclically-adjusted current budget.

Publishing his analysis, NIESR principal research fellow Simon Kirby said that these two targets would be identical by the end of the parliament as the Office for Budget Responsibility has forecast that there will be no excess capacity in the economy by 2019/20.According to the simulations using NIESR’s economic model, the short-term effect of the plan would increase output as a result of greater borrowing than implied by the coalition government’s spending plans.

However, the report added that the Bank of England would likely respond to this by increasing interest rates, reducing the impact, while the longer-term baseline for growth would remain unchanged.

Analysing the Conservatives' plan to reach an absolute surplus in the next parliament, the report found this would boost GDP by just 0.1 percentage point in both 2017 and 2018, and by 0.2 in 2019. Separate modeling for the party’s plans to balance the budget by making £12bn in welfare savings found a slightly higher short-term boost to growth (0.2 percentage points in 2017), followed by a 0.1 point increase in 2018 and 0.3 in 2019.

NIESR acknowledged the political parties would dispute parts of the analysis, but stated this illustrated why the remit of the OBR should be expanded to include responsibility for auditing party manifestos.

‘If given the appropriate resources and authority by Parliament, the OBR could help to improve significantly the quality of information on parties’ tax and spending plans in the run-up to future general elections,’ it stated.

• Also today, NIESR forecast that the UK economy would grow by 2.9% in 2015 and 2.3% in 2016. These are compared to 2.6% expansion reported in the preliminary estimate from the Office for National Statistics for 2014.

The projection for 2015 has been revised up significantly due to the sharp fall in the oil price, the think-tank stated, which was likely to boost consumer spending and improve the UK’s trade balance.

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