#GE2010: Measuring the disingenuity gap
The strange, staged, stunt-ridden spectacle that is Day One of a British election campaign brought us temporary relief from the disingenuous battle over tax rises and spending cuts the parties have been waging. But it will soon be back.
[UPDATE: Gordon Brown's GMTV interview means it is back already.]
Let me first of all justify the word "disingenuous". Ingenuous means frank and open; disingenuous means lacking candour, frankness, open-ness.
Now let me quantify it. According to Budget 2010, two factors contribute to slashing the budget deficit: cyclical and structural. The aims is to halve the deficit from 11.8% of GDP to 5.2% by 2013-14 - that is 6.6 percentage points or £112.5bn in 2013-14 money.
Here's how they get there according to Budget 2010 (measured in billions extrapolated from Section C15, page 186):
- 22.5bn as a result of the projected economic recovery.
That leaves the 90bn so called "structural deficit" which is addressed by:
- 19bn tax rises
- 38bn spending cuts
- 17bn from the reversal of the 2009 fiscal stimulus
- 17bn from an assumed upturn in tax receipts "not allowed for in the cyclical adjustment methodology, for example from a recovery in the financial and housing sectors".
The holes in this were spotted on budget day but have not gone away. They are twofold:
a) Only 20bn of spending cuts have so far been identified out of 38bn. Of these 11bn are "efficiency savings" not guaranteed to be delivered. 5bn are cuts already announced and 4bn are cuts to public sector pay and pensions. That leaves a minimum of 18bn of cuts yet to be specified, even if the full 20bn can be delivered.
b) The 17bn expected from housing and finance is not guaranteed to materialise.
c) Furthermore, the growth projections on which a future Chancellor gets 22.5bn out of a cyclical upturn have been decried as over-optimistic.
This is the credibility problem that lies at the heart not just of Labour's budget plans but which forms the "base case" for all potential incoming governments. They will face the same civil servants on May 7th as Alistair Darling did, over the same cold croissants, and will have the same problem.
Now let's look at whether the Conservatives' tax plans clear anything up. By raising the threshold at which people start paying the new, higher National Insurance contributions (NICs), the Conservatives raise 5.6bn less tax in 2011-12. But they have promised to cut spending in this financial year by 6bn, again through "efficiency savings". (For clarity, these are 2010 billions, not 2013 billions, but it's about half a percent of GDP in each case).
If we add the caveat that efficiency savings are not guaranteed, what the Conservative proposal does is alter the ratio between spending cuts and tax rises from about 66:33 to 80:20 by the end of the parliament. The Conservative plan also claims to get deficit reduction going a year earlier than Labour's, since the impact of the £6bn cut this year then feeds over into next, etc. I would also add the observation that the renegotiation of contracts seems to form a central core to the Tory 6bn of "low hanging fruit" - one senior Conservative told me that the major contractors were "surprised" that only Whitehall, of all their customers, had not demanded renegotiation of contracts during the downturn. We'll see how happy they are once the renegotiations start.
What the Conservative plans do not yet clear up is where the remaining spending cuts are coming from: £18bn in Labour's projection (£27 billion in the Tory analysis of Labour's budget, on the basis that some of Labour's efficiency savings are not achievable).
OK, now the Libdems. The Liberal Democrats have specified an extra 15bn of spending cuts, £10bn of which go on deficit reduction. The Libdem claim to be "closer than the other parties" in filling in the disingenuity gap stands up - but only if you accept all the planned growth and efficiency savings in Budget 2010 hold water.
Right now it suits the parties for us to get lost in the detail. But if you add up all the caveats it amounts to this:
There is at the very least an 18bn gap in the assumed deficit reduction plans of Labour and the Conservatives. Both parties already rely heavily on "efficiency savings" for which there is not proven methodology nor track record of delivery. In addition, the baseline scenario on which all other parties calculate rests on government growth projections way more optimistic than those of independent forecasters.
On top of that there is the pain projected for the first two years of the parliament after next, calculated at about £40 bn by the IFS, that is not accounted for by any planned cut, tax rise or growth.
The problem is, as Greece is now finding out, financial markets look for big-picture credibility.
I heard one Labour minister comment disdainfully, off camera, during a recent broadcast by one of my colleagues, "when in doubt ask the markets". Unfortunately this principle does apply, because the markets - long term weighing machine they may be - are, as the saying goes, in the short term a voting machine. For now they have suspended judgement on the UK's fiscal credibility because they know all parties plans are incomplete.
Being in government, Labour are pinned to figures on growth and the "cuts specificity gap" contained in Budget 2010. Opposition parties are currently making free with their right to propose all kinds of measures without reference to growth projections and total cuts targets. In that sense voters already face trying to measure apples against oranges.
But with all parties voters are being asked to make such a judgement on the basis of incomplete information, risky assumptions about growth and barely sketched out plans for efficiency savings.
What you therefore have to keep in mind when politicians rail at each other about tax, is the size of the cuts they have refused to specify and the riskiness of the assumptions on which they calculate those cuts, and the riskiness of their growth projections.