Coalition Management, Labour Outcomes?

Some features of the fiscal squeeze introduced at the outset of the coalition government continued and developed over the following four years. For example, on the tax side, the raising of the threshold for basic rate income tax by stages every year to a figure slightly exceeding the Liberal Democrats' manifesto promise of ?10,000 became a recurring feature of subsequent budgets and allowed the government to claim that 2.6 million working-age people had been taken out of income tax. But at the same time, as already mentioned, the threshold for the higher (40 per cent) income-tax rate stayed frozen until 2014, such that the government's opponents could equally claim that 1.5 million more people had been brought into that higher tax band during the 2010-15 Parliament and talk about a 'squeezed middle'.11 The so-called 'jobs tax', the increase in National Insurance (social security) contributions from 2011 planned by the Brown Labour Government which the 2010 Conservative manifesto had promised to scrap and the Liberal Democrat manifesto had also opposed, went ahead in 2011, but with a higher threshold than Labour had planned.

On the spending side, within the category of non-cyclical expenditure, healthcare, schools, and overseas aid spending remained 'protected' and indeed spending on overseas aid rose by one-third in real terms over the period. Outside those domains, there were dramatic reductions in police numbers (a spending domain that was protected under the Thatcher Government and which the Brown Labour Government had also proposed to protect in its pre-election budget) and numerous changes to welfare eligibility designed to reduce the growth of welfare spending. As we saw earlier, child benefit was frozen in the post-election 2010 budget and two years later that benefit was removed altogether from any family that included a higher rate taxpayer. Tax credits that the Labour Government had introduced in the early 2000s were withdrawn from families with taxable incomes above ?26,000 (well above the average wage). The government defended such changes on the grounds that it was important to limit benefits going to the better off (but did not apply the same principle to benefits for retirement pensioners) and to prevent benefit recipients from being better off than those in work at average wages, challenging the Labour Opposition to risk electoral unpopularity by defending welfare benefits above that level.

Amongst other changes in eligibility for welfare benefits, perhaps the most politically salient one was a change in housing benefit in 2012 that reduced the sums that welfare claimants could obtain for rental payments if they had one or more 'spare' bedrooms in their homes. That measure, officially titled 'the under occupancy charge', came to be dubbed by the government's critics as a 'bedroom tax' and a continuing stream of politically embarrassing hardship cases (for example, of disabled people or divorced fathers who wanted space to allow visits by their children) came to test the government's political cohesion.

Indeed, these tax and spending changes produced numerous political challenges. The slogan 'all in it together' (a perhaps unconscious echo of the 'equality of sacrifice theme' of the 1931 National Government, discussed in Chapter Four) that had featured prominently in the 2010 Conservative manifesto and reappeared in later budget speeches, was repeatedly used by the Opposition to attack the fiscal squeeze as unfairly bearing down hardest on the worst-off rather than those on the highest incomes. This charge became particularly marked after the 2012 budget, in which among other heavily criticized measures the government reduced the top income tax rate from the 50 per cent to which Labour had raised it in 2010 to 45 per cent. The Chancellor claimed that he had kept by a pledge announced in Opposition in 2009 not to cut the 50 per cent tax rate while there was a pay freeze on public sector workers, and that the estimated ?100m a year of revenue lost by the rate reduction would be more than offset by an extra ?500m a year from higher stamp duties on high-value real-estate purchases by wealthy individuals and corporate buyers. But the change allowed the Opposition to berate the coalition (and particularly the Liberal Democrats, whose leader had said only a few months before that a cut in the top tax rate was not a priority) for exempting the wealthy from the pain of fiscal squeeze, and challenge cabinet ministers to say whether they would benefit personally from the tax cut: 'The party that delivered the People's Budget of 1909 is supporting the Millionaires' Budget of 2012 ...'12

Although, as we have seen, the Conservatives and the coalition in general in 2010 had made much of the need for a shorter and sharper fiscal squeeze than Labour had planned, the result in financial outcome data at the end of the 2010-15 Parliament turned out to more closely reflect Labour's plan than that of the coalition. That is, by the end of the Parliament, overall debt was far above the levels envisaged in the 2010 plan. Actual revenue increases were less than had been planned under both Labour and coalition plans, while reductions in planned spending were more than had been planned in the coalition's first budget. Moreover, far from being eliminated by that time, the reported 'structural' (that is, cyclically adjusted) deficit was still running at well over 3 per cent of GDP. The government could certainly claim that the deficit as a proportion of GDP had more than halved between 2010 and 2015 (as had indeed been envisaged in Labour's 2010 plan), but it could not claim to have eliminated 'the bulk' of that deficit as its 2010 plan aimed to do.

So how and why did the coalition government come to deliver broadly what five years earlier the Conservatives had attacked as too modest in Labour's 2010 proposals? As noted earlier, it was on the revenue, not the spending side, where the squeeze fell short of what was planned in 2010. Revenue rose in constant-price terms (particularly due to the 2010 VAT increase and to a lesser extent by the tax on bank balance sheets and increased capital gains tax). But it did not rise relative to GDP and fell far short of the additional ?175bn or so by 2015 that the 2010 deficit reduction plan was predicated on, such that the squeeze turned out to involve proportionately greater emphasis on reductions in planned spending than had been envisaged in 2010.

That tax shortfall stemmed in part from the fact that economic growth over the five years, and especially in the first three, fell far short of the assumptions that had underlain both the Labour and coalition deficit reduction plans. In 2010 the OBR had forecast GDP growth of 1.2 per cent in 2010-11, 2.3 per cent in 2011-12, and 2.8 per cent in 2012-13. But the reported outcomes were respectively 2.02, 1.62, and 0.72, such that, between 2010 and 2013, the OBR forecast that GDP would grow by 4 per cent more than it did. According to official financial outcome data, total managed expenditure fell relative to GDP and in constant-price terms between 2010/11 and 2014/15, while total current spending rose in current money terms over that period. Much of that reduction in total managed expenditure in constant prices seems to have come from reduced debt servicing costs (stemming in large part from the massive economic-stimulus programme of quantitative easing involving purchase of extra government stock by the central bank that accompanied the fiscal squeeze)13 and from the planned reductions in capital spending that the coalition government had largely inherited from its Labour predecessor in 2010.

But there was also a political aspect to that outcome. Since the coalition government had chosen to outsource economic forecasting to a quasiindependent body in 2010, it could partially sidestep political blame for forecasting errors in a way not open to governments in earlier episodes (for example, in the early 1990s when Treasury forecasts of economic recovery had proved embarrassingly over-optimistic). But the coalition government could not so easily escape the charge repeatedly made by its political opponents that it had itself hampered and slowed down economic recovery both by its 2010 rhetoric of severe fiscal crisis (which was claimed by its opponents to have damaged economic confidence) and by its efforts to start fiscal squeeze earlier than Labour had planned.

Just as the previous Labour Government had blamed the 2008 financial crisis on sub-prime lending in the United States rather than its own conduct, the coalition government began to blame the slow economic recovery on a continuing crisis in the eurozone, where the travails of the euro common currency and the austerity measures associated with its management depressed demand in the UK's largest export market. Since the coalition government had argued that reassuring the financial markets was a key reason for an extra squeeze on top of what Labour had planned, it faced further political embarrassment when early in 2013 two of the major credit ratings agencies (Moody's and later Fitch) downgraded the UK's credit rating for the first time since 1978, on the grounds that sluggish economic growth then forecast by the IMF for the UK would make debt reduction more difficult.

Further, the effect of that disparity between forecast economic growth and outcomes was filtered through political choice. That is—in contrast to what happened in 1931, as discussed in Chapter Four—the 2010 coalition government chose not to modify its plans for fiscal squeeze after 2010 in the light of lower than expected tax revenue (and higher than expected cyclical spending), for example, by pushing tax rates up further or imposing much deeper spending cuts to keep to the 2010 plan and timetable for debt and deficit reduction.

The decision to let the timetable of the deficit reduction plan slip in the early 2010s was never formally acknowledged, but Chancellor Osborne introduced both the 2011 and 2012 budgets by saying that they were intended to be fiscally neutral rather than to tighten further.[1] In his 2013 budget speech, he declared he would neither make more spending cuts to hit the original debt and deficit reduction target nor undertake extra borrowing to stimulate the economy, as some were urging,[2] though in fact he altered his borrowing plans at that point to borrow ?48bn more than originally planned in 2013/14, ?60bn in 2014/15, and ?67bn in 2015/16.16

As a result of this unacknowledged change in its deficit reduction timetable, the coalition government could only claim that it had delivered the reduction in the structural deficit that Labour had planned in 2010. But a dramatic pickup in UK economic growth in 2013 and 2014, accompanied by a sharp fall in world oil prices in 2014 and 2015, improved the prospects for increases in tax revenues and falls in cyclical spending. And in 2014 the Chancellor set new 'bear traps' for the Opposition parties by announcing an overall cap in welfare spending (excluding only the state pension and unemployment benefits) and announcing plans for further reductions in spending in the following Parliament, 'to lock in our country's commitment to the path of deficit reduction.'

That plan presented the Labour Opposition with a challenge similar to that posed by the Conservatives in 1997, putting it under pressure either to promise to match those spending cuts or to explain what extra taxes it would raise to fund the additional expenditure. In this case, Labour did not repeat its 1997 strategy of promising to match the previous government's plans for spending reductions. Rather, it chose to match part (some ?30bn) of the further spending reductions planned by the coalition but still to spend some ?50bn a year more than Osborne's 2014 plan allowed for, to be funded by extra taxes on the rich, including a restoration of the 50 per cent tax rate on the highest earners and a 'mansion tax' on the most expensive houses. So Labour went into the 2015 election offering an alternative style of fiscal squeeze with different distributional emphases, rather than no squeeze at all.

The 2015 election result was widely predicted as another hung Parliament with a minority government or coalition, but in the event produced a clear but narrow overall majority (of twelve) for the Conservatives. The Liberal Democrats were reduced to a handful of MPs and Labour experienced a further loss of vote and seat share. The election result was shaped by two other parties, namely the UK Independence Party, a right-of-centre populist party which won some 13 per cent of the vote even though it only won one parliamentary seat, and the SNP in Scotland. The latter had made much of its opposition to 'austerity' imposed by Westminster and destroyed Labour's chances of a majority in the UK Parliament by winning all but one of Labour's former Scottish seats.

However, the new Conservative Government's pre-election plans for continuing fiscal squeeze were upset the following year when a narrow majority of voters in the June 2016 referendum on UK membership of the European Union unexpectedly chose the 'leave' option. That result led to consternation in the financial markets, the swift resignation of the prime minister, and the formation of a new government under his successor, the former Home Secretary Theresa May. May sacked George Osborne as Chancellor and Osborne's successor, Philip Hammond, announced the abandonment of the deficit reduction targets that had been set before the 2015 election.

  • [1] HC Deb 23 March 2011, c.951 and 21 March 2012, c.795. The IMF's chief economist (OlivierBlanchard) was reported to have criticized the UK government at that time for 'playing with fire'by its public spending restraint, though the following year the IMF approved the UK's fiscaladjustment plans and acknowledged it had previously underestimated UK economic growth(Armitstead 2014).
  • [2] HC Deb 20 March 2013, c.934. 16 (John Redwood) HC Debs 20 March 2013, c.963.
 
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