Do party manifestos have to be “fully costed”?

by Tom Startup on May 18, 2017 at 10:12 am in: From the blogs, Resilience, United Kingdom
by Tom Startup on May 18, 2017 at 10:12 am in: From the blogs, Resilience, United Kingdom

When, last week, a draft of the Labour Party’s manifesto was leaked to the BBC, there were red faces all round. It revealed some radical policies such as nationalising the railways, the abolition of university tuition fees, and smaller classes in schools. In the days that followed, Jeremy Corbyn, Labour’s maverick leader, and his shadow Cabinet were interviewed by journalists demanding that they explain the costs of such state largesse. This led to some particularly embarrassing moments, as shadow ministers struggled to explain how the policies would be paid for. In response Corbyn pledged that the actual manifesto, when published, would be “fully costed”.

Then on Tuesday the final manifesto was published, weighing in at over 120 pages: £49bn of extra spending funded by £49bn of tax rises, with an itemised costing for each policy. And yet the demand for “costings” has not abated. Laura Kuenssberg, of the BBC, grilled Jeremy Corbyn over the (allegedly omitted) cost of nationalising the water companies. So, what does “fully costed” mean and why should it be a requirement of party manifestos anyway?

The idea that parties should cost their own policy programme is a very recent development: successful manifestos of both Labour and the Conservatives in the past saw no such need (see for instance 1983 and 1997). Instead they were mostly statements of values and vague intent – the purpose being to tell the public what the party stood for, not how much they would spend. But in recent years as pressure on the public finances has grown, and Labour has lost some of its economic credibility, the demand for costings has grown.

In practise this demand usually means that for any given policy proposal which requires increased spending (say abolishing tuition fees) the party should explain where spending elsewhere will be cut, how much taxes will be raised or how much borrowing will be increased. But, as Chris Dillow, an economist and blogger, argues, taken more widely this is not sensible, because the level of government borrowing is not simply determined by governments.

This ignores the fact that the public finances are not under the government’s control. Government borrowing is the counterpart of private sector saving (both here and overseas). If the private sector wants to save more, then government must borrow more; the alternative is for it to depress the economy by cutting spending or raising taxes.” 

He goes on to point out that the Conservative government has consistently borrowed more money than it said it would – but that no one is accusing them of “uncosted” policy proposals. In other words, there is little point in asking the Labour party to say how much extra it will borrow, should it be elected, since that depends on many factors outside its control – not least the state of the economy they inherit.

Richard Murphy, an economist at Tax Research UK, and former advisor to Jeremy Corbyn, goes even further than Dillow. For him, the “fully costed” demand is a manifestation of a fundamental misunderstanding about the nature of government debt and money. According to him, since the government is the sole creator of money, and it can create as much as it likes “at a keystroke”, the public finances are not constrained in anything like the way that “full costing” implies. As he puts it:

Households can’t create their own money out of thin air to repay debt but governments [which have] their own currency and central bank (as the UK has) can. £435 billion of quantitative easing since 2009 proves this and yet everyone pretends that this has not happened, which is ludicrous. The fact is that governments and households are not the same at all because households may be constrained by the need to repay debt but governments are not.”

The only danger Murphy envisages in un-costed increases in government spending are that, if the economy is close to full output it might generate inflation. One might note, however, that with unemployment at a ten-year low of 4.7% that danger is not as remote as Murphy implies.

Simon Wren-Lewis, of Oxford University, although sympathetic to Dillow’s argument that governments are not in (full) control of the level of public borrowing, doesn’t accept the conclusion. He argues that although it doesn’t make much sense to demand “full costing” of every policy measure, it is vital that parties tell the public how government spending, taxation, and overall borrowing are likely to change under their plans.

It makes little sense to require that each item of additional spending is matched to a measure to raise additional revenue, because this is not how fiscal policy actually works in any country…On the other hand, if the actual or potential Chancellor is being questioned, it makes sense to ask whether the programme as a whole would increase or decrease borrowing. Chris is right that all a Chancellor can do is plan for a particular level of borrowing, but that alone is insufficient grounds for not asking about their plans.”

So, according to this, asking the Shadow Education Secretary to explain where the estimated £10bn to finance the abolition of tuition fees will come from is silly, but John McDonnell (the Shadow Chancellor) should still be required to explain his overall plans for spending, taxing and borrowing.

The obvious objection is that this would require parties in effect to “mark their own homework” – producing a fiscal and economic assessment of their own plans that is not only probably beyond their capabilities, but would lack credibility with the public. On that matter, Wren-Lewis supports the idea that the OBR (Office of Budget Responsibility, a government agency which monitors the public finances) should be allowed to provide an independent costing of all party manifestos. Countries such as the Netherlands, Australia and Ireland already do this sort of thing. The Congressional Budget Office plays a similar role for legislative proposals in the USA on a bipartisan basis, though not for campaign promises.

Since the OBR cannot yet fulfil that function, the organisation on whom the obligation to provide credible “costings” of party manifestos tends to fall, is the Institute for Fiscal Studies (IFS). Paul Johnson, Director of the IFS and a visiting professor at University College London, argued earlier this week that the obsession with “costings” misses the main point. The big thing about the Labour proposals is not their cost but the fact that they would fundamentally change the British economy:

Yes tax, spending and the deficit would all be higher. But the transformation in the role of the state, in regulation, and in the working of the labour market would likely have an even bigger impact.”

The demand that every extra item of spending be backed up by a specific revenue-raising measure is daft. However, although the impact of policies on the overall public finances is always uncertain, voters deserve some indication of the likely effects. That means parties should still be required to explain, at the aggregate level, the likely implications for taxation and borrowing – even if those projections are provisional. In this respect, Labour’s manifesto, for what it’s worth, is probably the most fully-costed manifesto to have ever have been presented to the UK public.
Nonetheless, as Paul Johnson implies, an excessive focus on the ‘cost’ of measures can be an unhelpful distraction. Labour’s policies are indeed radical; that’s why their implications for the British economy and wider society should be fully debated – not obscured by an increasingly shrill demand for ‘costings’.

Edited by Bill Emmott