The Conservative manifesto: an initial response

According to the declaration of the leader of IFS, Paul Johnson:

The Conservative party has made a pledge to introduce £17 billion of yearly tax reductions and a significant rise in defence expenditures. They claim that the funding for this plan will come from minimizing the anticipated welfare expenses by £12 billion, taking strict actions against tax fraud and cheating, and operating with reduced civil servants' numbers. They also plan to reduce management consultancy spending and enhance quango efficiencies. However, these funding sources are questionable and unprecise. Therefore, there is some scepticism towards the Conservative party's proposal.

I admit, I was also hesitant to believe that the 2015 manifesto could really deliver £12 billion in welfare savings. However, through significant cuts and four years of freezes, those savings were ultimately achieved. Although they were delivered later than the manifesto initially stated. This time around, there is a more difficult challenge. The amount of money being spent on healthcare benefits has rapidly increased. The number of new claims for disability benefits has doubled each month in comparison to 2019.

It is important to acknowledge that there is a problem that must be addressed. However, the current policies laid out are inadequate in achieving the goal of saving £12 billion annually. Some policies have already been announced and included in the official budget predictions, while others are unlikely to provide significant savings within the timeframe the Conservatives have claimed. It appears the government's strategy is to reduce spending on disability benefits, since such spending is increasing rapidly. However, it is not a simple task to reduce the number of people receiving disability benefits by half. It would require specific and difficult policy decisions, which have not been clearly communicated.

The largest reduction in taxes that has been assured is a deduction of 2 percent from the primary rate of National Insurance payments for workers. This reduction will cost over £10 billion every year, providing individuals who earn approximately £35,000 annually with about £450. However, it is important to mention that they would also miss out on £150 due to the continued freeze on the income tax and NICs thresholds. While the elimination of the main rate of self-employed NICs would be positively received by self-employed individuals, it would also reinforce the tax benefits of self-employment over regular employment.

The manifesto failed to reveal the details of where the proposed £10 to £20 billion cuts to unprotected public services, hinted at in the March Budget, would be made. Instead, the savings gained from reducing the number of civil servants and other expenses noted in the manifesto have been allocated to cover the extra spending on defence, leaving no relief for core public services. This silence on the issue suggests that these services will experience even more difficulty than previously anticipated. If anyone believed that civil servants, management consultants, and quangos were effective in delivering results, these plans propose an even more challenging situation than what was originally stated in March.

In this blog post, we provide a preliminary reaction by IFS researchers to the manifesto of the Conservative party. We will discuss various policy domains one by one, although this is not a comprehensive evaluation.

Additional evaluation will be made available within the following 14 days.

According to Tom Wernham, who works as a Research Economist at IFS, mentioned that...

The government plans to reduce the primary rate of National Insurance contributions from 8% to 6% and abolish the main rate for self-employed individuals. Along with previous tax adjustments, like the tax threshold freeze, this change means that the majority of workers will end up paying less tax compared to the unreformed system in 2019. Those who will benefit include employees earning between £24,000 to £62,000 a year (between the bottom third and top ten percent of earners) and nearly all self-employed individuals who earn enough to be taxed.

Getting rid of the primary self-employed NICs rate would further tip the scales in favor of self-employment versus traditional employment in terms of tax policy. According to the suggested modifications, individuals who are self-employed would encounter a tax rate of 20% for basic-rate taxpayers compared to a 35% rate for people classified as employees (whose earnings are subject to both employee and employer NICs). Incentivizing self-employment at a higher rate than traditional employment is not a positive step. Biasing rates towards the self-employed is not an effective means of promoting entrepreneurship and is not fair.

Other significant alterations to taxes mentioned in the manifesto pertain to housing and will be further elaborated on below.

No Tax Actions Planned

According to Stuart Adam, who is a highly experienced economist at IFS, he made the following statement:

The most unfavorable aspect of the Conservative's tax propositions is the things they are excluding.

The politicians have made a few promises that limit their ability to collect more taxes. They have vowed not to raise the income tax, VAT, corporation tax or other related taxes. They have also pledged to retain some unhelpful taxes, like business and agricultural property taxes. While this is good news for taxpayers, they are hesitant to make significant changes. The current council tax system in England is flawed, as it is based on outdated evaluations. This results in a wrong band for most homes. The government needs to address this issue, but they have not shown any plans to do so. As more people switch from gas-powered vehicles to electric ones, there is a need to revise how we tax cars. However, the ministers have ruled out road pricing, which makes it challenging to come up with alternative solutions.

The promises made in this manifesto seem to be influenced by political motives and lack a real commitment to improving the tax system. While it's understandable for a party to want to reduce taxes, the pledges being made hinder any potential for beneficial changes to the tax structure. The Conservatives have previously missed opportunities to reform the tax system and it seems they are not interested in changing that trajectory. By maintaining the current tax structure, they are preventing progress and advancements in this area. It's difficult to believe that our current tax system is the best we can achieve.

According to Tom Waters, who is an Associate Director at IFS, he expressed that...

The benefits plan aims to reduce the projected welfare budget by £12 billion annually. This reduction is driven by the substantial increase in the number of people claiming incapacity and disability benefits, resulting in the welfare budget's steady rise. The number of claimants for health-related benefits has seen a sharp increase since the pandemic, from 3.2 million in 2019 to 4.2 million today, with predictions indicating a continued rise to 5.4 million in 2028-29. This would increase spending from £35.6 billion in 2019-20 to £63.7 billion in 2028-29. The policies set forth to achieve this goal of a £12 billion cut, however, fall short of the necessary challenge. Some of the policies have already been announced and included in the official fiscal forecasts, but they are negligible, with others being insignificant.

Spending on health-related benefits has been increasing rapidly due to the pandemic, which could lead to significant financial issues. However, the proposed reduction by the Conservatives is likely to be challenging to implement, and they haven't provided many clear strategies. To save £12 billion, around 19% of benefit receivers (1 million) would have to be removed, or existing claimants might face substantial cuts of approximately £2,200 per year.

Investing In Public Services

According to Bee Boileau, a research economist at IFS,

The Conservative Party's plan for public service spending after the election doesn't seem to have changed much from existing plans. The total amount of spending plans will only be increased by £500 million by 2029-30, which is less than one-tenth of one percent of departmental spending. Unfortunately, this means that many unprotected areas will face real-terms cuts to day-to-day spending, including areas such as further education, prisons, and criminal courts. This is a problem because many of these areas are still not receiving adequate funding levels, and it will be impossible to maintain current levels of service provision or make improvements with these cuts. To make matters worse, the Conservative Party has earmarked funds for higher defence spending, meaning that the money cannot be used to top up spending plans elsewhere.

"Care For Health And Society"

According to IFS' Associate Director, George Stoye, they have found that...

The Conservative Party has promised to improve the performance of the NHS by meeting constitutional targets that have been missed for almost 10 years. This would be a significant improvement in various NHS services, such as waiting times for emergency and elective procedures. The party has also restated its commitment to implement the NHS long-term workforce plan. However, these promises would require a large increase in spending, which has not been seen over the past 14 years. While the party has committed to increasing NHS spending above inflation, the lack of specifics on financial resources makes it difficult to assess the feasibility of achieving these goals in one parliamentary term.

The Associate Director at IFS, David Phillips, expressed:

In the current election campaign, the issue of housing is a prominent topic. The Conservatives have proposed various measures to increase home-ownership by boosting demand-side efforts. These include permanent cuts to stamp duty for first-time buyers, the reintroduction and extension of the Help to Buy scheme, as well as a temporary capital gains tax exemption for landlords who sell to tenants. While this could help some aspiring homeowners, it could also drive up prices due to limited housing supply. Unfortunately, these policies cannot make housing more affordable overall when demand outstrips supply. While first-time buyers may benefit, those hoping to upsize and most renters will still struggle to purchase a home. The real beneficiaries in this situation would be property developers and current homeowners who aren't looking to upsize.

According to Imran Tahir, a research economist at IFS, stated:

Having the goal of offering appealing options after school for all young people is important, considering that 15% of 18 to 24-year-olds are currently not engaged in education, employment, or training. The Conservative Party's manifesto outlines ambitious plans, including increasing apprenticeships and decreasing degree courses, implementing a new post-16 qualifications framework, and instituting National Service for 18-year-olds. While each of these proposals is a significant reform on its own, there are also considerable challenges associated with their implementation. Trying to achieve all of these plans simultaneously could add even more instability and disruption to an already chaotic post-16 education system.

"Education Starts Early In Schools"

According to IFS Research Fellow, Luke Sibieta, it can be observed that...

Since 2019, the government has provided an extra £6 billion per year in school funding, which has reversed previous budget cuts and brought spending per student back to 2010 levels, adjusted for inflation. The Conservatives have promised in their manifesto to at least maintain this level of spending per student in real terms; however, this promise could actually result in a £3.5 billion cut to overall school spending due to a projected decrease in student enrollment by 400,000 through 2028. Such a large reduction in school funding has not occurred since the mid-1970s and could potentially lead to staff layoffs and school closures.