Liberal Democrats aim to tax and spend in a big way

The Liberal Democrats like to portray themselves as the most prudent party on the UK economy: deputy leader Ed Davey has accused the Conservatives and Labour of offering “fantasies” while “competing to bankrupt Britain”.

The centrist party’s election manifesto, published on Wednesday, claims its plans will allow the economy to grow faster, be greener and fairer than under the Tories or Labour.

But the manifesto confirms the Lib Dems are now a borrow, tax and spend party with some large and surprising pledges. Below are five key findings.

1. The Lib Dems claim a Remain bonus

The Lib Dems believe the UK would be better off by Britain staying in the EU, with a boost to economic growth coming from ending political uncertainty and encouraging private sector investment.

The party said in its manifesto that it would secure a “£50bn Remain bonus”, although that number relates to increased tax revenues over five years aggregated together.

The small print of the manifesto is clear that Lib Dem leader Jo Swinson’s core assumption is that the economy would be 1.9 per cent bigger in cash terms by 2024-25 than if the UK leaves the EU under Boris Johnson’s Brexit deal.

This uplift would raise £18bn of additional revenues in 2024-25, the final year of the next parliament, of which some would go on EU membership, leaving the Lib Dems with £14.3bn to spend.

The question is whether it is prudent to assume this Remain bonus. The Institute for Fiscal Studies, a think-tank, said the Lib Dem calculation was “within the range of plausible estimates”, but cautioned that better economic performance would arise only if the UK’s EU membership were a settled issue for the long term.

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2. The party wants to tax and spend in a big way

The Lib Dems want to increase annual day-to-day public spending by £63bn in cash terms in 2024-25 compared with plans by chancellor Sajid Javid contained in his March spring statement.

The Lib Dems aim to balance the current budget — the difference between government tax receipts and day-to-day spending.

This implies therefore that taxes would have to rise by £63bn by 2024-25, in a move that would raise the tax burden by 2.4 percentage points to 39.6 per cent of national income.

Torsten Bell, director of the Resolution Foundation, an independent think-tank, said the Lib Dems’ proposed spending rise represented “a very significant increase in the size of the state funded by higher taxes on a par with those of [Labour leader] Jeremy Corbyn in the 2017 election”.

One thing stands out as odd in the Lib Dems’ costings of their manifesto. The party suggests borrowing £12.5bn to finance part of its additional spending but included this a table of additional tax receipts.

The Lib Dems justified the move on the basis that it is equivalent to money that Mr Javid allocated in his September spending round, also without additional taxation.

Bar chart of £bn in 2024-25 showing The Lib Dems' tax and spending plans

3. The Lib Dems are focused on education and welfare

There is some exaggeration in the Lib Dems’ education funding plans, under which the party proposes to increase spending on schools by £10bn in cash terms in 2024-25 compared with 2019-20.

Mr Javid’s spending round in September announced a £7bn increase by 2022-23, so the Lib Dems’ plans are very similar to the Tories, although the opposition party claims to offer “more than the Conservatives have offered in every year of the parliament”.

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There is no doubt that education is Ms Swinson’s big priority. From a big increase in childcare funding to new personal accounts for skills training, this new spending amounts to more than £33bn a year by 2024-25 when Scotland, Wales and Northern Ireland are taken into account. That is more than half the additional spending that the Lib Dems propose.

Boosting social security is the other large Lib Dem spending item, at almost £10bn a year.

4. The party would hit taxpayers and companies

The Lib Dems would raise £18bn a year by 2024-25 by adding 1p to all income tax rates and increasing corporation tax to 20 per cent.

But the party still had to find almost another £20bn a year from smaller tax increases.

Just over £5.5bn is secured by the Lib Dems abolishing the annual allowance in capital gains tax, which would hit richer people. There is also a large increase in air passenger duty: regular flyers would face charges averaging more than £400 a flight.

The Lib Dem manifesto said another £6bn could be raised every year from measures targeting tax avoidance, but Paul Johnson, IFS director, said this appeared “dubious”.

5. The Lib Dems are eager to borrow like the Tories and Labour

Like the two main parties, the Lib Dems intend to take advantage of low interest rates to borrow for markedly higher capital spending.

The headline Lib Dem claim is that spending would rise by £130bn over five years, most of which would be focused on addressing environmental issues, including plans for better insulation in buildings.

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This £130bn sum suggests public sector net investment would rise from about 2 per cent of national income to over 3 per cent, and since the money would be borrowed, it would make the Lib Dems vulnerable to breaching their pledge to keep government debt falling as a share of gross domestic product.

The party’s planned level of capital spending sits between Labour’s ambitious proposals and the Conservatives’ more cautious blueprint.

Line chart of Public sector net investment as a % of GDP showing The parties' plans for capital spending



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