Labour and Lib Dems could strike deficit deal in coalition – thinktank

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Labour and the Liberal Democrats could strike a deal on deficit reduction based on their shared commitment to meet the charter for budget responsibility, and still not need to implement any further spending cuts beyond those already made for 2015-16, a new analysis by the Resolution Foundation finds.

The analysis certainly tallies with the private thinking of the business secretary, Vince Cable, and some close to the shadow chancellor, Ed Balls.

Agreement on deficit reduction is bound to be central to any coalition deal-making.

But the finding that neither party needs to cut substantially in the next parliament to meet their stated commitments will be a surprise to many observers.

The analysis, written by the chief executive of the Resolution Foundation, Gavin Kelly, looks at the two parties’ commitments to tax rises and bring the current deficit into balance by 2018-19, a goal both parties endorsed in the Commons when they voted for the charter of budget responsibility.

Although the Conservatives insist the charter commits all parties to to a further £30bn of spending cuts in the two years to 2017-18, Kelly points out the carefully negotiated wording of the charter only requires there to be a plan to reach a current balance three years down the road. This means that in any emergency budget this June, or again in an autumn statement in 2015, the government would only have to set out a plan for achieving balance on the current account in 2018-19.

Kelly argues anyone claiming that the charter commits the parties to getting rid of the deficit by 2017-18, so requiring £30bn of cuts, “are making a big mistake”. A number of parties including the Conservatives and SNP have made that claim.

The Resolution Foundation argues “if restoring current balance in 2018-19 is the key fiscal goal guiding any Labour-Lib Dem deal, the two parties would be signing up to only £6bn of consolidation by 2018-19”.

Kelly says there are several problems in the way of a deal.

In addition to voting to achieve current balance in 2018/19, both parties have set out additional objectives.

Both also supported a debt rule in the charter that requires debt as a percentage of GDP to be falling in 2016/17. To fulfil this requires £10bn of fiscal tightening in that year.

Labour has said it wants to get rid of the current deficit as quickly as possible in the next parliament, a formulation that might be quicker or slower than the timetable in the charter.

Danny Alexander, the Treasury chief secretary, in his post-budget statement to the Commons said he wanted to run a significant current surplus in 2017-18, faster than the timetable in the charter.

Kelly argues, given that one party appears to want a tighter fiscal policy than the charter and the other may want something looser, it is sensible to conclude they could coalesce around the charter date of achieving balance in 2018-19.

Kelly also finds the two parties are probably not that far apart on the blend between tax rises and spending cuts necessary to achieve current balance in 2018-19. The Liberal Democrats have already proposed raising £6bn via anti-avoidance measures, and another £6bn of extra taxes, through a range of taxes that broadly fall on the affluent.

Labour has said less about its proposed tax rises: its mansion tax is earmarked for NHS spending so does not help with consolidation. But its 50p top rate would help close the gap. Kelly contends it may be possible for both parties to agree £4bn of tax rises and £6bn in tax avoidance measures.

As a result, Labour and the Liberal Democrats could then reach a deal that met the requirements of the charter and not require anyfurther net spending cuts after the current year.

Spending would remain flat in real terms in 2016-17 and then grow very slightly in the following two years, before rising roughly in line with the economy in 2019-20. This would allow spending to rise by £15bn over four years.

Kelly also finds that this would represent about £7bn more spending than that implied by the SNP’s recent proposal to increase departmental spending by 0.5% a year. This higher spending under the hypothetical Labour-Lib Dem arrangement that Kelly sketches out results from the tax rises he has assumed, the shift to reaching balance in 2018-19 (rather than 2017-18) and the improvement in the underlying fiscal numbers at the budget.

Powered by Guardian.co.ukThis article was written by Patrick Wintour, for theguardian.com on Thursday 2nd April 2015 17.24 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010