Tory manifesto: What are the economic implications? And does the reality match the rhetoric?

Unquestionably the manifesto’s most significant economic section lies in the pledge that the UK will leave the EU customs union and the single market

Is this really a post-Thatcher manifesto? (Hulton Archive)

Theresa May’s Conservative manifesto for the general election has been hailed as a watershed moment in the history of the party and indeed for the broader UK political landscape.

“Post-Thatcherism” and “third way Conservatism” are just two of the descriptions of the 84-page document, entitled Forward Together.

But does the austere-looking tome, which contains just a single picture (of Ms May), live up to this billing?

Is this really a fundamental economic break with the past?

Burying Thatcher

The shift in tone is unmistakable.

David Cameron’s two manifestos in 2010 and 2015 sought to move away from the Thatcherite view that there is “no such thing” as society. Ms May’s document does the same, but it also goes further and attempts to rehabilitate the state too.

The manifesto talks of the “good that government can do” and the need for the state to intervene in the economy and business through an “industrial strategy”.

Another unmistakable repudiation of the old religion of Thatcherism is the remarkable claim that “true Conservatives…abhor inequality”.

Rhetoric and reality

There are some policies that would have a progressive impact on the income distribution.

Probably the biggest surprise in the whole document is on social care policy, where the manifesto ditches a previous Conservative plan to cap an individual’s total lifetime costs (before the state steps in) at £72,000 on the grounds that this would mostly have benefited “a small number of wealthier people”.

The manifesto also promises to means test winter fuel payments, on the same grounds that the current universal system helps wealthier pensioners who don’t need it.

There is a promise to continue with the relatively generous increases in the minimum wage promised by the previous Chancellor George Osborne, although this would actually tend to benefit those in the middle of the income distribution rather than the bottom.

The “triple lock” on pensioners’ incomes is to be replaced with a double lock after 2020, although this doesn’t make much difference to the generosity of the pledge on longer term projections.

And that’s really where the fiscal progressivity ends.

There is no mention of reversing Mr Osborne’s major working age benefit cuts, which are set to push up inequality and child poverty over the coming three years according to respected think tanks such as the Resolution Foundation and the Institute of Fiscal Studies.

True Conservatives may “abhor” poverty, but it will almost certainly increase under a new Conservative government.

Corporate governance

The kind of intervention that the manifesto promises in the way UK companies are run is actually pretty limited.

It says companies will have to publish chief executive-worker pay ratios, hold annual votes on pay and have workers represented on boards. Yet the detail on all three exposes potential loopholes.

The pay ratios are to be between bosses and the “broader UK workforce pay”, without specifying whether this is the workforce of the firm in question or average workers in the wider economy. The manifesto says annual pay votes will be “strict” but doesn’t say if they will be legally binding.

And the worker representative can be something as tokenistic as an existing non-executive director charged with speaking up for the labour force.

Economic intervention

There’s talk of “new rules” governing foreign takeovers of UK firms, but nothing specific.

The biggest departure is on energy prices and the “safeguard tariff cap” on retailers to prevent them gouging their non-switching customers. The cap is slightly less interventionist than Ed Miliband’s proposed energy freeze from 2015, but not much so.

On housing, the manifesto says that councils will be encouraged to build new homes for rent. This is certainly a shift from the Thatcher era, when councils were largely stripped of their role in new social housing provision, although there are no specifics or targets outlined by the manifesto.

On immigration, the Conservatives are extremely interventionist – and the consequences are unlikely to be economically positive.

The Cameron-era pledge to reduce net migration to below tens of thousands is retained, with no mention of how this will affect the economy (the Treasury’s own watchdog, the Office for Budget Responsibility, believes it will do harm).

To help achieve this the charge on firms who employ non-EU migrant workers is doubled to £2,000.

The option to carve out students from the target is explicitly ruled out, threatening serious damage to the UK’s university sector.

The manifesto says the Conservatives want scientists from around the world to come and work in UK, failing to acknowledge the risk that they may not wish to come if the predominant mood on immigration is hostile.

Brexit

Unquestionably the manifesto’s most significant economic section lies in the pledge that the UK will leave the EU customs union and the single market.

Ms May had already said this in January, of course. But because the pledge is now in black and white in the manifesto, it means that (presuming the Conservatives win the general election) she will be able to claim a Parliamentary mandate to enact these wrenching and inevitably disruptive changes.

But what trade arrangements with Europe will replace them?

The manifesto repeats Ms May’s claim that “no deal is better than a bad deal” and the implied threat that she will walk away from EU negotiations if necessary. But the emphasis in the document on the desire for a “smooth” and “orderly” Brexit suggests this isn’t particularly credible.

And by talking of a “fair settlement” with the EU on “rights and obligations” as a departing member state in accordance with the “law and spirit” of future UK-EU partnership, the document also leaves hope for an agreement on a “Brexit bill” – of potentially up to €100bn (£86bn) – which would, in turn, open the way for talks to begin on a trade deal.

The document also prepares the ground for a temporary transitional deal post-2019 (before the new trade deal comes into effect), involving continued payments to the EU budget. This would enable the UK to avoid a “cliff-edge” scenario in 2019.

The manifesto says the UK could “make a contribution” to the EU for participation in specific projects. There is also no specific rejection of European Court of Justice oversight, which could also make a transitional deal possible.

The cost of it all

The overall fiscal orientation appears unchanged. The manifesto promises to put the budget on course to be balanced “by the middle of the next decade”.

Previously the goal set out by the Chancellor Philip Hammond was for this to occur by “as early as possible in the next Parliament”, giving an assumed cut-off of 2025.

There are various giveaways pledges outlined, such as plans to increase research and development spending to 2.4 per cent of GDP within a decade, to maintain the international aid budget at 0.7 per cent of GDP and to grow the defence budget by 0.5 per cent above inflation every year.

There’s £4bn for schools and £8bn for the NHS (although these are not particularly large sums relative to the growing public demands on those services).

But the Tory failure, this time, to commit to no new increases in VAT, income tax or National Insurance, leaves room for them to pay for this.

Moreover, the big determinant of the state of the public finances in the coming years will be the impact of Brexit.

If the long-term sustainable growth rate of the UK is permanently lowered by leaving the single market, something most economists expect, then that will put a permanent hole in the public finances.

Regardless of the rhetoric, locking Britain on course for that is likely to prove the most profound economic legacy of this manifesto.