Crisis, what crisis?

By Hugo Dixon
April 16, 2010

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– The author is a Reuters Breakingviews columnist. The opinions expressed are his own. –

 Crisis, what crisis? That could be motto for the election manifestos published by Britain’s main political parties this week. Neither Labour nor the Conservatives addressed the country’s fiscal crisis head-on.

Instead, they have sought to bribe the electorate with promises.

There are some good ideas in the manifestos. But there are too many promises to cut taxes and not to touch spending – as well as a general lack of urgency. Once one puts the pledges into categories of good, bad and ugly, there are too few in the former bucket.

OVERALL DEFICIT

The two parties are promising roughly the same fiscal squeeze over the course of the parliament. Labour says it would halve the deficit, which is standing at 167 billion pounds or 12 percent of GDP, over four years. The opposition Tories say they would reduce the bulk of the deficit over five years. But such cuts aren’t deep enough. What’s more, neither party has been prepared to say how they will achieve them.

The Tories do seem more determined than Labour to control the deficit. Next year, they would freeze public-sector pay for all except the lowest-paid one million workers. And they would even start cutting elsewhere this fiscal year — promising an emergency budget within 50 days of taking office and measures to cut spending by 6 billion this financial year. But they won’t say how they’ll do this, except that they will cut waste.

They have also promised to set up an independent watchdog to vet whether the government’s spending plans were sustainable. This would only be able to make recommendations — so it can bark not bite. That said, it might help get the government onto the fiscal straight and narrow.

But the Tories also have a really bad idea — reversing the government’s “tax on jobs”. Going back on the increase in National Insurance Contributions (NICs) would cost 6 billion pounds a year. Given the state of the public finances, that is irresponsible.

Labour scores 1 bad idea for lack of urgency on the deficit, and no good ideas at all.
The Tories score 2 bad ideas, but also have 2 good ideas.

TAX/BENEFITS
NICs aren’t the only Tory tax promise that will cost money. The Conservatives would introduce a new tax credit to encourage marriage. And they’d raise the inheritance tax threshold to 1 million pounds. It really doesn’t make sense to shell out more money when the government is bleeding red ink.

Labour is better on inheritance tax — promising to freeze the threshold for four years. But it has also made an unfortunate pledge not to extend the reach of Value Added Tax. Various goods — notably food and children’s clothing — don’t qualify for VAT. By putting these off limits, Gordon Brown has denied himself a useful lever for addressing the deficit.

The Tories do have one good idea on tax: simplification. They want to streamline the current cat’s cradle of tax and benefits. Their one big specific idea is to cut corporation tax to 25 percent funded by abolishing complex reliefs and allowances. They haven’t spelt out what they mean by this, so there could be nasty surprises. A radical — and welcome — proposal would be to phase out the tax-deductibility of interest payments.

The Liberal Democrats, which may be influential in a hung parliament, have one bad idea – raising the threshold before income tax is paid to 10,000 pounds. The country just isn’t in a state to finance such generosity. But they also have a good idea on simplification. They’d align the rates of capital gains and income tax. That wouldn’t just raise money. It would stop rich people going to elaborate lengths to convert income into capital to cut their tax bills.

Labour: bad ideas 1; good 1
Tory: bad ideas 2, good 1

HOUSING
Both Labour and the Conservatives especially have made unfortunate promises on housing. They’d abolish stamp duty on homes worth less than 250,000 pounds. Housing is already wildly under-taxed; it doesn’t need further subsidies. The Tories tax cut would be permanent. At least Labour’s would last only two years. And Labour would simultaneously raise stamp duty on properties worth over 1 million pounds — so there would be no revenue loss in the short run and actually a gain in the medium term.

The Liberal Democrats have a good-ish proposal on housing: a “mansion tax” of one percent a year on properties worth over 2 million pounds. This may seem as a way of bashing rich people. But the current system of property taxes — the council tax — actually benefits those in expensive houses. A mansion tax would level things out.

Labour: bad ideas 1; good 1
Tory: bad ideas 1; good 0

PENSIONS
Labour and the Tories have both made the same bad pledge on state pensions: they’d increase them in line with average earnings from 2012. One of the reasons that Britain’s finances aren’t in an even worse mess is because Margaret Thatcher severed the link between state pensions and earnings in the 1980s. This U-turn is retrograde.

That said, the Conservatives also have two good ideas. Firstly, raising the state pension age from 65 to 66 for men from as early as 2016, and for women from 60 to 66 from as early as 2020. And secondly, capping pensions for public-sector workers at 50,000 pounds a year. Public-sector pensions are extraordinarily generous. It is a shame that Tories’ haven’t been more radical. But these are still steps in the right direction.

Labour also has a useful pension idea — scrapping the default retirement age of 65. That should make it easier for people to hang onto their jobs as they age, instead of needing early pensions.

Labour: bad ideas 1; good 1
Tory: bad ideas 1; good 2

SOCIAL SPENDING
Both Tories and Labour have fallen over themselves to pledge more money for the National Health Service. Of course, the NHS is a national treasure. But how will the government cut its deficit if the biggest-spending department is off limits?

Labour compounds the error by also treating schools as a sacred cow. What’s more, it has promised to give old and needy people the right to free care in their own homes. The best thing that can be said about this potentially extremely expensive proposal is that it will be phased in, with the big bills only hitting in the parliament after next.

The Tories have promised to protect various perks for the elderly, including winter fuel allowances, and free bus passes and television licences. The Tories have missed an opportunity to scrap universal allowances in favour of more cost-effective help for those who really need it.

Labour: bad ideas 3; good 0
Tory: bad ideas 2; good 0

CITY PRACTICES
Both Labour and the Tories have the same good idea about banks: tax them in proportion to how much they rely on hot money. Rightly crafted, this would not only raise money but also give banks an incentive to operate more safely. The Conservatives, though, are taking an unnecessary risk by promising to do this even if other countries don’t follow suit. That potentially could undermine the UK’s financial services industry. Labour’s multilateral approach is wiser.

The government’s approach on takeovers, though, would be bad for the City and industry. It would require a two-thirds majority of shareholders to vote in favour of any bid. Putting grit in the sands of the takeover machine could protect underperforming management from external discipline.

Neither party has got financial regulation quite right. Labour would try to stop future crises by modifying the failed tripartite system comprising the Bank of England, the Financial Services Authority and the Treasury. The Tories would abolish the FSA and hand its banking powers to the BoE. But the BoE didn’t exactly cover itself with glory during the crisis. A better solution would be to keep the FSA regulating individual banks but create a new independent committee — comprising the BoE, the FSA and some maverick outside voices — to prevent bubbles.

Labour: bad ideas 2, good 1
Tory: bad ideas 2, good 1

CONCLUSION
Sadly, this rough assessment of the parties’ biggish ideas finds 19 bad proposals, against 10 good ones. Labour has nine bad ideas and only four good ones. The Tories have an edge of sorts, with ten bad ones compared to six good ones.
But neither party is really pulling out the stops. Given the risks the economy faces, the failure of imagination and courage is a great shame.

(Editing by Chris Hughes and Aliza Rosenbaum)

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