News, debates and opinions on global economic issues from the Economist Intelligence Unit.

 

Latest

Robin Bew, Editorial Director and Chief Economist, EIU

25 May 2011
Eurozone countries doomed to restructure

 

 

Latest

David Butter, Regional Director, Middle East & North Africa

14 Mar 2011
Business supports Middle East revolt - but risks ahead

 

 

Latest

,

16 Nov 2010
Under pressure - The changing role of the healthcare CIO

 

 

Latest

Neil Prothero, Economist Intelligence Unit

22 Jun 2010
Budget Reaction

09 Apr 2010

Election Countdown: Tax and spending divide widens

You need Adobe Flash player to view this content.
You can download it the flash player here

There are very real differences opening up between the parties on tax and spending after Labour's disastrous slip up on National Insurance, says Neil Prothero.

By viewing the video or accessing the transcript you are agreeing to accept the Cantos terms and conditions.

For more macroeconomic analysis plus opinion on equity and commodity trends, watch The Longview.

more»

Hello and welcome to Election Countdown in a week when the general election campaign finally took off. My name is Tony McMahon and I'm joined as ever by Neil Prothero.

Neil, the first big row of this general election campaign was over National Insurance contributions - Labour defending its proposals, the Tories on the attack and the Lib Dems very critical. What did you make of this row?

I think I can probably take three things from it so far. I think the first one is that it has hit Labour quite hard. They didn't see this coming and the fact that so many business leaders have come out and seem to be excited with the Tory proposals and idea. I think Labour having been a bit surprised with this are not quite sure how to respond if only because the Tory idea is to use efficiency savings to make up the difference and a large part of Labour's deficit reduction plan rests on efficiency savings as well. So criticising that approach is quite difficult for them. They not quite sure which way to go at the moment.

The second point is that it has probably shifted the debate over deficit reduction a little more clearly. Not a lot, but just a little more in terms of actually setting up a few dividing lines between the two parties, that little more clearer in terms of the general approach the two parties take medium-term and the Tories clearly see tax cutting and reducing the size of the State as the way to go. Labour believe that a larger State, which may be involving tax rises, is a separate.

So there is a bit more of a divide in that area. Obviously that includes the fact that whatever happens you're going to have to have tax rises and spending cuts after the election, but that seems to be what's happening so far.

So on this public spending debate we have Ed Balls for Labour now ring-fencing education. We've already had the Tories ring-fencing health. Do you think there is a danger of far too much ring-fencing going on?

The NHS is a key area. Education is a key area that both parties clearly don't want to be seen to be cutting now. Whether that's a realistic ideal in terms of how much cutting of public spending there will have to be, I'm not too convinced that that's the case. I don't see the amount of spending that has taken place over the past decade in, for example, education and healthcare has been enormous. It has obviously led to quite a lot of benefits. But to actually take the stance that that should be ring fenced and you can't make any savings from that whatsoever seems to me not a particularly realistic way to go. But you have to take into account public perceptions and obviously on the NHS and education it is very important.

My feeling is that when push comes to shove in a year's time, two years' time, that you won't be able to avoid some sort of cuts. Obviously they'll try to protect front line spending, but I think it is inevitable that at some point there will be reductions.

We've got now the main parties it seems moving to common ground on spending cuts. The Tories are toning down their early draconian language. We've got Labour saying, yes, some cuts are inevitable. Is there any difference do you think between the three main parties on the public spending cut issue?

It is difficult to say. The whole sort of issue over National Insurance, for example, it seems to be dominating debate, but you still must remember that it only accounts for, I think the difference is about £5.6bn that the Tories are planning that won't be increased in tax and when you've got an annual deficit of £170bn, £180bn, it's still relatively small fry.

So you can debate over what sort of taxes and sort of impact in the short-term will be, but you really have to still have to take into account a larger view that this is an enormous deficit. It has to be brought down. Probably quite soon after the election the bond markets, the financial investors, will demand some attention on this.

So that does imply tax rises, if not National Insurance and other tax rises, whether that's VAT, income tax, new green taxes and deep spending cuts in a lot of areas.

So the parties are unlikely to approach this issue before the election because the public they realise don't want to hear it, but it is inevitable and I think there will be quite a few surprises post election in terms of what the actually policies mean for the man on the street in terms of taxes and spending.

And finally, are you a cider drinker and what's your view of the debate, if we can call it that, about that tax hike?

I'm not especially a cider drinker, but it is strange this wash up in the past few days as they've sort of tried to push through what policies they can. Obviously the cider tax has been sort of quietly removed from the pledge to raise it by 10 per cent tax or something.

Obviously that is good news for cider drinkers. Again, it was a strange sort of policy to take in terms of it was a very small fry, doesn't really make anything in the big scheme of things in terms of the deficits and I think there are obviously much bigger issues, more difficult decisions to make in the coming weeks and months.

Thank you Neil. Well in future weeks we're going to be getting commentary from the Economist Intelligence Unit on the leadership debates that are coming up. Hope you'll join us for that. Until then, thank you and goodbye.

Also on Cantos

Bookmark & share:

Sign up to Our Newsletters