How much is Labour going to spend and how will it pay for it?

Analysis: The party has a trick or two up its sleeve to raise the cash for its hugely ambitious programme, writes Ben Chapman

A Corbyn government would introduce a new tax on multinationals (Reuters)

Labour’s manifesto contains some huge numbers and no shortage of ambition: ramping up NHS spending, pay rises for teachers, nurses and the armed forces; not to mention an unprecedented programme of infrastructure investment.

There is a lot that will be attacked by the Conservatives as profligate or unrealistic but which in fact makes abundant economic sense.

The hard part for Labour is likely to be selling its spending plans to voters used to a decade of austerity rhetoric about “taking difficult decisions” after “maxing out the credit card”.

Much of Labour’s proposed spending is more like taking out a low-cost mortgage than a payday loan. They will borrow money, but cheaply and for long-term assets.

The party has clearly separated capital expenditure – to be funded by borrowing – from the current budget, paid for by taxes.

The really big number in Labour’s manifesto – £400bn for a "national transformation fund" – will be borrowed over a decade to be spent only on capital investment such as transport and green energy.

But won’t the debt burden be crippling, voters might well ask.

Labour’s argument is that when borrowing is so cheap, as it is now, these investments pay for themselves. Nationalised water and energy firms receive income from users for example, while schools, libraries and fast broadband create a public good that generates stronger economic growth and larger tax revenues.

Interest rates on 10-year government debt are extremely low at just 0.75 per cent. Sajid Javid claims that investors will be terrified by a Corbyn government, ramping up the cost of that debt. But bond markets are relatively relaxed about funding Labour’s plans. Demand for safe government debt is high, and the chances of the UK defaulting are small.

Boosting investment from under 3 per cent of GDP to 4.5 per cent (about the same as Sweden, but less than Norway) will jolt the economy back into stronger growth, Labour says.

There is a powerful argument for more spending to kick-start the economy and end the pain inflicted by austerity.

The government claims that the economy is strong but even its own in-house fact-checking team would struggle to pass that one. Wages remain below their pre-crisis peak of 12 years ago – the longest stagnation since the Napoleonic Wars. Over the last two quarters the UK has had just 0.1 per cent economic growth. Levels of investment have plummeted and productivity is flatlining.

If we believe austerity was a plan to fix the economy, rather than an ideological project to shrink the state, it has objectively failed.

Years of cuts have also left no shortage of potential areas for investment. However, such a rapid expansion of spending would need to be managed very well to avoid waste.

Labour’s plans on day-to-day spending are arguably more radical. The NHS will get a 4.3 per cent annual funding boost, Tory cuts to school funding will be reversed and teachers, nurses and doctors will get a pay rise, along with many other public-sector workers.

All this and more will cost an extra £83bn a year by 2024 – a 10 per cent increase on current levels, funded by tax rises on high-earners and companies.

The party wants to bring in billions more from multinational corporations through a “unitary” tax. This looks at the whole company, estimates the value of its activity in the UK and taxes that part, rather than allowing firms to lower their bill by shifting profits into tax havens. But it’s an untested approach so any estimate about what it might bring in has to be speculative.

Private schools will lose their VAT exemption, and oil companies will be hit with a one-off windfall tax to fund green energy.

Corporation tax will go up gradually from 19 per cent to 26 per cent, putting the UK close to the average level among wealthy nations.

Entrepreneurs’ relief will be abolished, a move welcomed by the Association of Accounting Technicians, which said the tax break was “extremely expensive, misguided and ultimately ineffective”.

However, there are doubts about whether Labour can can raise the sums it wants to through taxes on companies and well-off individuals alone. Paul Johnson, director of the Institute for Fiscal Studies, is one to have voiced scepticism.

And, he adds: “The truth is, of course, that in the end corporation tax is paid by workers, customers or shareholders so would affect many in the population.”