Labour financial manifesto analysis

Posted on: 28 April 2010 by Mark O'haire

Prudence was a message extolled by Gordon Brown when he was Chancellor of the Exchequer, but does his 'sweetened' election budget promise security and future prosperity?

Similar to the Conservatives, the theme that runs through this 'red stick of rock' is poor attention to detail; in particular to that mere matter of the £167bn deficit. Labour have stated they will be relentless in saving money on every pound of public sector money used and eliminating waste. The question to both of them by voters will be, "Where have you been for 30 years"?

The key points of the Labour manifesto are:

No stamp duty for first time buyers up to £250,000 for two years, this is offset by an amazingly good value 5% tax on properties above £1m. So you get a £50,000 tax bill with no involvement by the government to buy your home!

This will be seen by many as another step to tax the wealthy. We need to remember that those who are wealthy didn't all do it by hand-me-downs and dishonesty and there are plenty of places for wealthy people to go and set up in business.

Labour have said they will begin to release their stakes in publicly controlled banks and reforming banking. That will contribute heavily toward the deficit.

They intend to invest heavily in building a high-tech economy and also to support growing businesses by introducing UK Finance for Growth which will introduce £4bn capital for them. The devil will be in the detail. Being cynical, 'we get rid of one quango to create another which doesn't understand business and is run by people who have never run a business', sounds like a very possible outcome.

Labour’s Manifesto

Labour have stated they will be relentless in saving money on every pound of public sector money used and eliminating waste. The question to both of them by voters will be, "Where have you been for 30 years"?

They will also introduce a minimum wage rising in pace with average earnings. That's good timing as average earnings by definition of the manifesto (cuts) should actually be falling.

Labour has said it would promise not to raise the basic, higher or top rates of tax during the next parliament whilst tackling the deficit, yet the Institute of Fiscal Studies says it's essential. In 1997, 2001 and 2005 they used virtually the exact same statement above but the reality was rather different. I seem to remember a top rate of tax at 40%. It's now 25% higher at 50%. Promises, promises.

Labour has already driven taxes up to abnormal levels so that promise is a little 'rich'.

Consider that current tax policies cost us £31bn per year and with the government's tax changes already announced (they just changed things but didn't increase them), that total is expected to rise to £45.4bn by 2014-2015. That's over £100 per month-per family in today's terms, for a party that said they wouldn't increase our tax.

How did they do that? Simple, they just freeze your income tax allowances so more people will move through different tax bands and pay more. But that of course isn't increasing tax is it?

In 1997 we had the eighth lowest tax burden of 28 OECD countries. We are now 13th lowest.

According to the IFS the UK had the largest increase in public spending of the 28 OECD countries from 1997 to 2010 and so the UK has leapt 16 places to become the sixth largest spender.

It's easy to see why public spending is therefore a target. Most voters would echo that and will be able to publicly say, 'did we really need those kerb stones in our town which had to be done before the end of the budget year or we lost our budget?'

A little flaw in the - we won't raise taxes plan - might also be pointed out. In 1997, there was a tax credit on dividend income in pensions. Labour got rid of that. This has cost pension funds £100bn. Say it quickly and it doesn't sound much. But apparently they didn't and won't increase taxes!

You might also want to check the wording of the VAT pledge, however, which leaves the door wide open for a VAT hike on some goods but leaving the politically sensitive ones of food, school books etc. My guess, as with the Tories, is that VAT (quite what value any of them add I am not sure) will be the target.

If inflation falls as they expect, the VAT could be the tool they use to create more inflation. Remember higher inflation helps to erode the real value of debt.

In a manifesto that has nothing really new - and Labour are not bothered by that - we have a number of tax and business policies further to the above -

A new toddler tax credit. To what problem is that a solution? They have also announced more assistance for fathers for a 'father's month' with flexible paid leave. Is this for real?

Businesses are already up against it with state meddling, now they will somehow have to deal with key members of staff simply having a month of paid leave. Phew. To what problem is this a solution. Isn't there a better way to solve it?

Having read through Labour's business policies I can see little to even comment on.

One glowing issue is their commitment to broadband speeds which mixed up the word megabit and megabyte and offered us broadband eight times faster than it can deliver. Hey, it's only detail and numbers, so don't worry about that.

Labour also makes a 'commitment' to greenness that is at best a yawning rendition of non committal. Can you imagine making the following statement as an opening to your businesses plan - "To be on track for the transition to a low-carbon economy".

To be 'on track' for a 'transition'. It's fair to say that vague an objective could be achieved and like many other voters the cynicism of this easy form of taxation will only increase.

Constitutional reform however may well be a real vote winner. They started badly however with - the MP's expenses scandal providing a 'once in a generation' opportunity for reform of parliament and democracy - most voters will scream at that. After all how many people really need moats?

How many need to claim for a mortgage they don't have? Most voters will not necessarily want reform but are probably more content with a trial and jail sentence. After all, that's what a voter would expect if they were found guilty of the some of the MP's antics.

A good bit

Labour have, however, announced a referendum for October 2011 on changing the election system from a first past the post, to alternative vote but most importantly on having a fully elected and renamed House of Lords.

In the UK, Chris Tarrant reviews mad Japanese game shows and crazy foreign advertisement campaigns, but most other countries I suspect will just show ten minutes of the House of Lords. Crazy.

Similar to the Conservatives, Labour have also offered a full review of policing, including allowing failing forces to be taken over by more effective forces nearby.

Labour talk about Northern Rock but its details once again are lacking. They are looking for a 'mutual solution' which gives customers a stake instead of selling shares but it's difficult to see how that will repay the billions of tax payers money.

Detail, eh. Who needs it?

Whilst Labour does at least have more specifics on reducing the deficit than the Tory's in terms of headline forecasts, there is still a lack of real information to prove if they will be successful.

I suspect the reason for not giving us the treasury's forecasts for social security spending after 2011 is by design as we can neither prove or disprove their numbers.

Labour Summary

In summary, Labour would appear to have a better handle on the numbers as they at least published headline figures.

Like the Tories they haven't really taken into account the impact of debt deleveraging, unwinding of a global financial crisis, and the fact that if you increase taxes, cut public spending and thereby take money out of people's bank accounts, they will spend less and GDP will get battered, thereby leaving the purse empty.

Labour promises as the 'party of experience', (a synonym for skill or incident) that it will not raise tax further but after the vast breaches of its promises in this area, the voters will be none too content about believing it.

Like the Conservatives, Labour's lack of detail leaves us all wondering if they know what they're doing, or if they really do know what they're doing and how much it will really cost and just don't want to say it.

I suppose the big advantage of a returning government will be the fact they cant blame the current mess on anyone else!

5.9/10 Poor detail but good move to reform the House of Lords

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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