Fiscal alternatives: What do they mean for post-election negotiations?

One of the issues that senior civil servants have grappled with in recent years is how to support the different parties in a coalition government without crossing the line between their official duties and work that is clearly political in nature. The farcical publication today by the Treasury of an alternative fiscal scenario, entirely designed to put flesh on the bones of the Liberal Democrat manifesto, didn't just cross the line: it pole-vaulted over it. How any mandarin could have signed it off is inexplicable. It is almost as if there are secret Situationists in the Treasury facilitating acts of political theatre to subvert their political masters; how else can the chief secretary's yellow box photo-opportunity be explained?

Nonetheless, two serious points arise from this episode. The first is that the civil service should be allowed to give technical policy support to all of the major parties, opposition and government, in a defined pre-election period during which manifestos are being drawn up. IPPR's report to the Cabinet Office on international civil service reform in 2013 recommended this step. It would ensure a level playing field for the political parties, and prevent the civil service being drawn into blatantly political activity.

The second is that the position on deficit reduction taken by the Liberal Democrats in their alternative fiscal scenario enables us to see clearly what the crux issues will be for fiscal policy negotiations after the general election, assuming there is a hung parliament. Attention focussed yesterday on the chancellor's easing of spending cuts in his revised projections for the end of the next parliament. However, coalition or supply-and-confidence agreements between the parties are much more likely to turn on the question of whether, and if so how, a future government should stick to the goal of closing the structural current deficit by 2017/18. The Liberal Democrats and the Conservatives are both committed to that goal; they differ on the balance of tax rises, departmental spending reductions and welfare cuts necessary to get them there. Labour is committed to a surplus on the current balance by the end of the parliament which, as the IFS pointed out today, would enable it to increase public spending over the full term (although it should be noted that there is an ambiguity in Labour's plans, inasmuch as they signed up to the coalition's Charter for Budget Responsibility, which sets a rolling, three-year horizon for returning the cyclically adjusted current budget to balance). Its position is much closer to that of the SNP, as the Resolution Foundation's Gavin Kelly has previously shown. Neither party is committed to the departmental cuts in the first two years of the parliament implied by the Conservative and Liberal Democrat plans.

If another Conservative–Liberal Democrat coalition or supply-and-confidence arrangement is formed after the election, the two parties will argue about the balance of cuts and tax rises up to 2017/18, as well as what follows – none of which will be insurmountable. If Labour and the SNP enter into an arrangement, the fiscal path of the government also looks relatively straightforward. But things would get difficult for Labour if they wanted to secure the support of the Liberal Democrats and the latter insisted on closing the structural deficit by 2017/18 as a condition of agreement. Lacking differentiation from Labour on such a wide range of other policy areas, the Liberal Democrats may choose to make this specific timetable the defining issue for fiscal strategy, even if there is no economic justification for it, rather than allowing it to roll forward on a three year basis, as the mandate currently permits. Conversely, the Conservatives may have to contend with backbench demands to protect defence spending at 2 per cent of GDP, putting significant pressure on other departments. The Democratic Unionists have tabled similar demands, but they will not want deep welfare cuts to pay for it.

The tables below show you just how tough these scenarios are for public spending in the early years of the next parliament. They are what is at stake in the election debates and the negotiations that may follow.

1: The Coalition scenario

• Assumes that the total resource departmental expenditure limit (RDEL) falls in line with OBR projections (i.e. does not take account of unconfirmed policy changes to annual managed expenditure [AME])
• Assumes that NHS spending is protected in real terms from 2015/16
• Assumes that spending on 5–15 education is protected in flat cash terms per pupil
• Assumes that international development spending is protected as a proportion of GDP

Table 1
The Coalition scenario: Real-terms percentage change in RDEL, 2014/15–2017/18

^{*Excluding Northern Ireland, Scotland, Wales, reserves and allowances.}
Note: All figures are for resource spending and exclude capital spending.

2: The Conservative scenario

• Assumes that the fall in RDEL reflects cuts to welfare of £12bn and an extra £5bn raised through anti-avoidance
• Assumes that NHS spending is protected in real terms from 2015/16
• Assumes that spending on 5–15 education is protected in flat cash terms per pupil
• Assumes that international development spending is protected as a proportion of GDP

Table 2
The Conservative scenario: Real-terms percentage change in RDEL, 2014/15–2017/18

^{*Excluding Northern Ireland, Scotland, Wales, reserves and allowances}
Note: All figures are for resource spending and exclude capital spending.

3: The Lib-Dem scenario

• Assumes that the fall in RDEL reflects the Lib-Dems' package for AME and tax
• Assumes that NHS spending is protected in real terms from 2015/16
• Assumes that all spending in RDEL within the Department for Education is protected in real terms
• Assumes that international development spending is protected as a proportion of GDP

Table 3
The Lib-Dem scenario: Real-terms percentage change in RDEL, 2014/15 to 2017/18

^{*Excluding Northern Ireland, Scotland, Wales, reserves and allowances.
Note: All figures are for resource spending and exclude capital spending.
Figures updated 20/3/2015.}