Is Labour set for a "spending spree" costing £25 billion?

30 January 2014

According to the Times's front page yesterday, a future Labour government would go on a spending spree that would cost the taxpayer £25 billion:

If that headline didn't sound bad enough for Labour, the paper also reported that the Insititute for Fiscal Studies (IFS) think-tank had exposed a "sleight of hand" over the spending commitments made by the Shadow Chancellor, Ed Balls.

So what are they talking about? It began with a speech given by Ed Balls to the Fabian Society over the weekend. Here are some of the key pledges he made:

  • "The government's day-to-day spending totals for 2015/16 will be our starting point.
  • "There will be no more borrowing for day-to-day spending.
  • "The next Labour government will balance the books and deliver a surplus on the current budget and falling national debt in the next Parliament.
  • "We will get the current budget into surplus as soon as possible in the next Parliament.
  • "How fast we can go will depend on the state of the economy and the public finances we inherit."

One theme is constant: the Shadow Chancellor is talking about 'day-to-day spending' and the 'current budget', rather than all government spending. This is an important disctintion, because there are two main ways of measuring the budget deficit.

The most commonly quoted measure is Public Sector Net Borrowing, which measures the difference between the government's revenue minus both day-to-day and investment spending (known more technically as 'current' and 'capital' expenditure). This could be described as the 'overall' deficit.

The main alternative measure - the current budget - is simply the difference between revenue and current spending, which doesn't factor in investment spending directly.

Mr Balls makes clear he's referring to the latter measure by repeatedly referring to balancing the books for 'day-to-day' spending.

£25 billion 'spree'?

That's where the £25 billion comes in. The Times asked the IFS to compare the current projected course of the current budget with Labour's stated objective of getting a surplus in the next Parliament.

The latest estimates from the Office for Budget Responsibility (OBR) suggests that under the current fiscal plan set out by the present government the current budget (currently about £85 billion in the red) will enter surplus in 2017-18, generating £25 billion (today's prices) for the Treasury each year by 2018-19.

Finding Labour's £25 billion leeway on spending comes about by assuming the party's plans will slow the pace at which the current budget moves from deficit to surplus so that it only just reaches a surplus in 2018-19 - a year later than the current forecasts. That means that the £25 billion of surplus forecast to swell government coffers in 2018-19 wouldn't be available to ministers.

However these assumptions are open to question, not least because Mr Balls actually committed the party to a surplus "as soon as possible", depending on the state of the economy. This leaves the Shadow Chancellor flexibility to accelerate the pace at which the budget deficit is eradicated if he feels it is appropriate.

Labour has also argued that allowing more scope for borrowing to invest could result in better growth in the economy, which in turn could generate more tax receipts for the government. The knock-on effect on the wider economy of increased investment spending is also outside the remit of the IFS analysis.

In addition, as commentators in the New Statesman and the Times have pointed out, Labour's stated plans don't leave as much room for spending manoeuvre as appears at first glance.

According to Mr Balls, Labour will deliver a "falling national debt" in the next parliament. If that's referring to Public Sector Net Debt - which includes investment spending - then the party's spending commitments may well turn out to be more constrained than the Times makes out.

Update (3 February 2014)

One of our readers has pointed out an additional consideration when judging Labour's 'falling national debt' promise is that Public Sector Net Debt is often expressed as a proportion of GDP rather than in absolute terms. This means that, with a rising national income, debt could still fall as a % of GDP even if it's rising in cash terms.

Update (30 March 2015)

The article incorrectly said the most commonly quoted way to measure the deficit was 'public sector new borrowing'. We've changed this to 'public sector net borrowing'.

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