Conservative financial manifesto analysis

Posted on: 28 April 2010 by Mark O'haire

The Conservatives' scaremongering over National Insurance rises are yet to be validated by any concrete proof that Tory plans can deliver a realistic alternative.

"A Conservative government will act now on debt to get the economy moving. We will deal with the deficit more quickly than Labour, so that mortgage rates stay lower for longer with the Conservatives."

That's a bold statement and a sign of the fluffy data that makes its way throughout the Tory manifesto.

How exactly will lower debt mean lower mortgage rates for example?
We're told the Bank of England set the rates but that will be dependent on wide economic factors of which public or private debt doesn't really have an impact. If anything, lower debt will mean rates can rise. Hmm.

I do like the general thrust of the Conservatives approach but if there was more exact workable data I might take better note.

The key points are -

  • A one year public sector pay freeze in 2011 (excluding the one million lowest paid workers.
  • Bringing forward the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women.
  • Stopping tax credits to families with incomes over £50,000.
  • Cutting spending on Child Trust Funds for all but the poorest third of families and families with disabled children.
  • Capping the biggest public sector pensions above £50,000.
  • A 5% pay cut for Ministers followed by a five-year freeze, and a 10% reduction in the number of MPs.
  • Reduce welfare dependency.

All of this is good stuff but they could simply abolish the embarrassing child trust fund which has been as popular and successful as a cardboard licking competition.

The capping and reduction of public sector workers is essential given their disparity with the private sector and their recognition of this coupled with the actions they are taking is essential. Ireland (more on that later here) is a few stages ahead of this and their clear focus has been on cutting public sector expense which appears to be making positive waves.

A strong common theme (less detail than needed) running through the Conservative manifesto relates to this movement to less government wastage, responsibility and common sense.

It can be seen in the views of the NHS where politically motivated targets will be scrapped, NHS performance data will be put online and GP's pay will be linked to the performance they deliver. There is a strong and rising concern running across the public of wastage of the tax they pay, of public sector thought processes of 'we have a budget, spend it or lose it'. The Conservatives appear to be tackling that but as is the case with their manifesto throughout - not enough detail.

If you're spending, you will need to be cutting costs elsewhere or raising taxes. So...the Conservatives have not ruled out increases in VAT, income tax or National Insurance - VAT at 22.5% is a good bet.

Moreover the details in relation to public spending are lacking. There are few real pledges on tax apart from the vote pleaser of no increase in National Insurance for lower paid workers next year.

There are also no firm spending plans for the next five years. If the Tories expect to 'cut the deficit faster than Labour', taxation will have to rise and this thought process is supported by the institute for Fiscal Studies (IFS).

Conservative‘s Manifesto

The Tories have said they will "increase the proportion of tax revenues accounted for by environmental taxes" - that sounds expensive.

The Tories plan, however, is to raise the Inheritance Tax threshold to £1 million; raise the stamp duty threshold to £250,000 for first-time buyers; cut corporation tax; cut employer National Insurance contributions for the first 10 employees of new businesses; put a floor under landfill tax until 2020 and reform Air Passenger Duty.

That sounds like spending, rather than raising money. You might, however, see that the devil is in the lack of detail and the Tories would be better placed in providing the fine detail to the electorate who, in the absence of any real detail, will fear the whiplash of a new government blaming an outgoing government for the current situation, and simply hammering us all for tax.

Some early signs of that will be in the move towards 'vote blue, go green'. The public is already sick of huge taxation and no action, where in the interests of a greener environment (whatever that may look like), governments have battered our lifestyles into submission, yet locally and globally they have done absolutely nothing structurally to create a sustainable greener environment.

The Tories have said they will "increase the proportion of tax revenues accounted for by environmental taxes" - that sounds expensive.

My view will be that VAT will be used as an inflation buffer which will collect excellent tax revenue whilst at the same time keeping inflation artificially high and thereby reducing the real cost of our borrowing by the impact of inflation.

Green taxes will be very unpopular unless there is real global action on infrastructure, and there is real detail and purposeful action in their offering of the 'green deal' with each household.

The business community

And what lies in store for the business community? We're told they'll cut corporation tax, simplify the tax system, build a network of business mentors, provide loans to would be entrepreneurs, and start business-led local enterprise partnerships.

There are few businessmen in the private sector who don't have a cold chill running through their spine at the thought of a government-led mentor scheme, so the devil will really need to be in the detail. You'll remember there are no businesses in the UK with a £167bn deficit.

Furthermore, for the last two years businesses have been paying through the nose for their finance from banks who are funded by... the tax payer and business people.

The whole promise was that banks would be forced to lend. Whilst their incomes and salaries have been 'checked' there is absolutely no pressure being put on banks to lend, and this would have been an easier place for the Conservatives to begin (if they really wanted to).

Whilst much of the approach towards business is actually 'spending', if used wisely (there is no detail) will be a welcome and refreshing change. I am unsure of the plans where public sector workers will be allowed to form 'employee led co-operatives' and then bid to take over the services they run.

To what problem is that a solution? This is pretty radical and only really points to a solution to two issues - either current managers are not competent, or staff do not currently take a responsible attitude with public sector finances. If either were true, would such a radical step be required? I suppose only the public sector will know the answer to that, and they're a big vote.

As I look for further evidence of recouping cash, I sort of give up, especially as I find that council tax will be frozen for two years. Hmm, another vote winner involving spending.

Don’t worry about it happening though. The freeze is 50% funded by central government reducing the spending on consultants and advertising (all for that) but the rest will come from council savings. Precisely where will that come from? The freeze will only occur, however, if the council can actually make the savings!

Conservative summary

So to summarise the Conservative’s manifesto...

Believe me our finances are not in good order and my final summary in relation to threats will explain that. 118 pages of a manifesto and four are about macroeconomic policy - I nearly choked.

Sharing a similar strategy to Labour, neither parties made any attempt to explain further how they would reduce the £167bn deficit. That lack of detail runs through like a stick of rock and whilst I'm advised they want a private sector controlling business, the complete lack of detail on this simply shows they probably have no real idea how that will occur - so it probably won't be happening.

Given the deficit is supposed to be at the heart of its agenda, you might have thought there would have been a little more detail.

But detail may be an issue.

A few interesting points

Consider that in October, Mr Osborne claimed he would save £13bn by increasing the state retirement age from 65 to 66 from 2016. The National Institute of Economic and Social Research (NIESR) said it would take five years longer and they would fall £3bn short. Ok, we can all disagree but when you find that the NIESR provided Mr Osborne with the detail you might be scared.

Scared indeed - like those people who lost fortunes in 1992 when we exited the ERM on that black Wednesday. It cost Britain £3.3bn and trading losses were estimated at £800m. If the government had kept $24bn in foreign reserves it could have made a profit but the government spent £27bn propping up the pound. And whilst we paid 10-12% interest rates on our mortgages the 'special adviser' to the then Chancellor was none other than - yes a Mr David Cameron.

The Tories targets of reducing the "bulk of structural deficit over the next parliament" leaves me cold. What does bulk mean. There is no detail. Imagine presenting your bank with a plan to repay a bulk of their debt - exit stage right.

Mr Osborne said he would raise £7bn a year by 2014-2015 with his pay cuts, cuts in tax credits etc. They have, however, dished most of that back via the freezing of council tax and National insurance. Interestingly the Treasury and IFS are at odds with the government on the council tax savings saying that the savings will be £300 million (21%) less than they're saying per year.

We all know that all parties have left lots of room for further cuts but I suspect that the pain will be felt in those first two years while the harsh reality of debt deleveraging, post banking crisis issues and cuts in public sector incomes will make their way through to spending and in turn GDP.

I'll cover this in my overall summary as none of the parties seems to have factored this in to their numbers.

5.8/10 for lack of detail

By Peter McGahan

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Peter McGahanPeter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by in 2009.

Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.

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