Election '97: Labour to toe Tory line on economy

Manifesto analysis: Pledge to stick to Conservatives' public spending plans mean tax burden must rise

We have heard from the party of boom and bust, of tax and spend, on how it would manage the economy. Yesterday, it was Labour's turn.

The new Labour manifesto published yesterday was lighter on specifics than Shadow Chancellor Gordon Brown's many and lengthy speeches and is designed to send out two messages about economic policy.

First, a Labour government would manage the economy responsibly. It would retain the 2.5 per cent inflation target and outdo the Government by actually hitting it. It would stick to the existing public spending plans for two years.

Second, Labour policies would make a difference to what, 15 years ago, we would have called the supply side of the economy - to incentives for work, business efficiency and tax reform to promote saving.

What makes the manifesto more than an exercise in out-Torying the Tories is a matter of tone. Unlike the Conservative version, this one talks about how the poor and unemployed could share in the benefits of a growing economy.

Questions of distribution, of fairness as Labour would put it, are turning out to be where the two main parties differ most on economic policy. For although most of the partisan sound and fury is about big picture issues such as tax and spending, whoever is in government after the election will face exactly the same constraints on that front.

A Labour government, just like the Conservatives, would probably have to raise taxes at some point. The manifesto repeats Gordon Brown's pledge to stick to the existing public spending plans for two years, meanwhile conducting a thorough review of spending priorities. It suggests - optimistically, according to many economists - that lower unemployment can deliver big savings on social security expenditure.

The manifesto also pledges to follow the "golden rule" for government borrowing: over the course of the business cycle, the government will only borrow to finance investment. The rule implies lower borrowing on average than the Conservatives have achieved. The grim arithmetic of the public finances means these only add up if the tax burden rises.

Labour has pledged that the basic and higher rates of income tax will not go up for at least five years. That leaves open the possibility of higher income tax through limiting tax allowances and reliefs - the biggest of which is mortgage interest tax relief, or Miras. Alternatively, Labour could tax companies more heavily, perhaps by stopping insurance companies and pension funds from claiming back the advance corporation tax on the receipts of dividends from the companies they invest in. Many analysts think this measure likely because it would end the pressure on companies to pay high dividends rather than retain more of their profits for investment.

The tougher task for a Labour government will be sticking to the Conservatives' spending plans. These involve slashing real-terms growth in spending from about 3 per cent a year in the five years from 1992 to less than 0.5 per cent a year for the next three years. If it can be done at all, it implies a wrenching shift between some kinds of expenditure and others.

The Labour equivalent of clear blue water emerges in manifesto pledges to introduce a "sensible" national minimum wage, to sign the Social Chapter, to get young people and single parents into work and make sure 16- and 17-year-olds have achieved a minimum qualification. Yet even here the water is shallower than the two main parties would like to admit.

Take Labour's welfare-to-work measures, to be funded by the windfall tax. Both parties recognise that long-term unemployment can only be reduced by getting the people concerned into jobs - any jobs - because the only way to move up the employment ladder is to get on to one of its rungs.

The Conservatives favour the stick - workfare and the Job Seekers' Allowance. Labour favours the carrot - rebates for employers, or job opportunities in the voluntary sector or an environment task force, alongside the number one priority of raising levels of education and skill. The stick is cheaper, the carrot fairer, but they point in the same direction.

Leading article, page 21

What Labour could raise from other taxes

Abolish Miras pounds 2.4bn

Abolish married couples' allowance pounds 2.8bn

Restrict personal allowances to 23% pounds 1.5bn

VAT on private education and health pounds 1.5bn

Withdraw tax credit on Advance

Corporation Tax pounds 5bn

Total pounds 13.2bn

(excludes Windfall Tax)

Source: NatWest Markets