Labour sets out plans for responsibly rebooting the economy – as it emerges Tory tax plans would rip up fiscal rules and cause public sector debt to rise

As the Tory leadership race heats up, Labour reveals how contenders’ unfunded tax cuts would not only rip up the government’s own fiscal rules – but also create a £24 billion current budget deficit – with the public sector debt reaching 84% of GDP by 2026/27 as a result.

It comes as Labour’s Shadow Chancellor Rachel Reeves speaks at the Resolution Foundation’s Economy 2030 Inquiry conference, setting out how Labour’s “iron-clad” fiscal rules will protect the public finances and lay the foundations for a growing economy.

The rules include a pledge to only borrow to invest, committing to cut Britain’s debt burden.

But Reeves will also stress how Labour’s partnership with business, their Climate Investment Pledge and their plans to buy, make and sell more in Britain will get the economy growing – a crucial component of creating good jobs with decent wages across the country.

Reeves will underline how “responsible management of our public finances are the only route to providing the strong foundations we need to reboot our economy, revitalise our public services and re-energise our communities.”

Her speech will show how “the tables have turned” on fiscal responsibility and that “any lingering sense that the Conservatives are the party of economic responsibility has been shredded to pieces over the past few days.” 

Labour have repeatedly criticised the Conservatives for their unfair approach to the tax system – taking money out of working people’s pockets instead of getting rid of loopholes like non-dom status and private equity carried interest loophole.

Labour’s Shadow Chancellor of the Exchequer Rachel Reeves MP is expected to say:

“The tables have turned. Any lingering sense that the Conservatives are the party of economic responsibility has been shredded to pieces over the past few days. 

“Instead of setting out serious plans to help people with the cost of living crisis, just as we hear terrifying estimates of how much energy bills will go up again in October, we arepresented with the extraordinary spectacle of a Tory tombola of tax cuts - with no explanation of what public services will be cut, or how else they’d be paid for.  

“The level of unfunded tax cuts being bandied about this week would blow a massive hole in the public finances. 

“Every single Conservative leadership candidate supported the government’s fiscal rules when they were passed into law in January, but now they are prepared to take a flamethrower to them.” 

Talking about Labour’s own fiscal rules and a positive vision for growing the economy, she will say:

“I've set out the fiscal rules which will bind the next Labour government. Rules which I will stick to with iron clad discipline. 

“Because responsible management of our public finances are the only route to providing the strong foundations we need to reboot our economy, revitalise our public services and re-energise our communities.  

“And they will be paired with an absolute commitment to ending the shocking levels of waste and fraud we’ve seen under this government, strengthened by the creation of a new Office of Value for Money, to make sure every pound of taxpayers’ money is treated with the respect it deserves.  

“Back in September I said that I am more than happy to take on the Tories when it comes to economic competence - because I know we can win. If only I knew back then that they wouldn’t even bother putting up a fight.”  

ENDS

Notes to editors:

Register for Resolution Foundation event on 13 July -https://www.resolutionfoundation.org/events/stagnation-nation/

How would Tory tax plans see debt grow by public sector debt 84%?

·         Over the contest, Tory leadership hopefuls have pledged unfunded tax cuts including a reversal of the NICs rise, a reversal of the rise in corporation tax, a further cut in fuel duty, unfreezing of income tax thresholds – an average package by candidate costing around £46 billion a year.

·         There are three ways they could fund the immediate cuts – tax rises elsewhere, spending cuts or more borrowing.

·         Given candidates are making a pitch against the highest tax burden and aren’t spelling out where cuts will fall, the impaction is that they would be borrowing more.

·         But on current forecasts, the government expects to run a surplus on the current budget of around £22bn in 2023/24, with public sector debt is currently expected to fall from 83% of GDP in 2023/24 to 80% of GDP in 2026/27.

·         That means that not only would these current Conservative tax proposals turn next year’s current budget surplus into a £24bn current budget deficit, and see public sector debt grow to 84% of GDP by 2026/27.

·         That also means would lead to higher interest costs rising to around £2bn by 2026/27.

What are Labour’s fiscal rules? Labour’s five fiscal rules are:

1.      Labour would pay for all day-to-day spending.

2.      Labour would borrow to invest, ensuring we can meet the challenges of the future.

3.      Labour will have a target to reduce the debt as a share of our economy.

4.      In a crisis and as we recover, Labour would use fiscal policy to support the economy and get the public finances back on track. Labour would task the independent Office for Budget Responsibility with defining when a crisis has hit.

5.      Labour would take greater account of public sector assets as well as debt in fiscal policy. Selling national assets to massage the debt is not good management of the public finances.

·         Labour’s fiscal rules are designed so that we would never set out spending or tax pledges without saying where every penny comes from.

·         We would get debt falling and balance the current budget.

·         This allows us to invest in the net zero transition through our Climate Investment Pledge.

·         And rather than marking our own homework we would give the independent Office for Budget Responsibility the sole power to determine when economic conditions are such that any rules should be suspended.

How are the Tories breaking their own fiscal rules?

·         Tax cuts on the levels being proposed tears up the fiscal charter that the Tories adopted only in January.

·         The charter commits them to balancing the current budget in three years’ time and getting debt falling in three years’ time.

·         But in the crucial year of 2025/26, a tax package of the scale being proposed by Tory hopefuls would mean a deficit of more than £20bn on the current budget, and debt rising by around 0.4 percentage points of GDP.

·         That means once again, just like every other debt and deficit target they have legislated for, the Tories are going to break their fiscal rules.

·         The Tories fiscal rules include a clause that allows them to rip them up on a whim – they aren’t worth the paper they are written on.

What are Labour’s principles of tax fairness?

·         At Labour Conference 2021, Labour’s Shadow Chancellor Rachel Reeves laid out how Labour’s fairer approach is about creating a system that is fit for the 21^st century, and is held up by three pillars of reform:

o    Is it fair? Above all Labour believes the tax system must be fairer, particularly between different forms of income. Unearned income should be taxed at a rate closer to earned income from work.

o    Is it efficient? Labour will review every tax break – those that are expensive, inefficient and can no longer be justified will be scrapped.

o    Is it shifting the burden of business tax? Labour wants to see the tax burden shift towards online firms to support SMEs and high streets.