What do their spending plans really add up to?

The Institute for Fiscal Studies sifts through the rhetoric to establish exactly what we can expect to happen after Thursday.
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The Independent Online

All three parties have been criticised for not giving the electorate enough detail about their spending plans to reduce the UK's structural deficit which is now close to £1 trillion. According to the Institute for Fiscal Studies (IFS), which last week published a damning report saying all three parties have gaping "black holes" in their finances.

Robert Chote, director of the IFS, said the Government's refusal to hold a spending review before the country goes to the polls had contributed to the lack of clear fiscal targets. However, he also rejected the "misleading" and "overambitious" claims of all three parties regarding efficiency savings, which form only part of the solution in the view of the IFS. He added that all the parties would try to spend public money as efficiently as possible whether or not they were trying to cut spending, warning that the next government will be forced to introduce significantly more tax increases and welfare cuts than have been acknowledged by any of the parties so far.

Here we look at what the three parties have actually said:

Conservatives

If the Tories win on Thursday, they will start with an emergency Budget to set out their plans.

Sir Alan Budd, a former Labour adviser and founding member of the Bank of England's Monetary Policy Committee, is currently crunching the numbers as a Tory adviser in the party's new Office for Budget Responsibility.

Sir Alan and George Osborne are expected to deliver a package of measures designed to deal with the biggest UK deficit since the Second World War, which promises to cut the UK's shortfall quicker than the other parties. The job will be finished in 2015/16 under the Tories – 12 months quicker than its rivals, they claim.

Unlike Labour, the Tories are focusing on bigger spending cuts in preference to tax increases to deal with an annual shortfall of some £71bn based upon this year's numbers.

According to the IFS, the Tories favour a ratio of spending cuts to tax rises of four to one, which roughly equates to £57bn of spending curbs to £14bn in tax hikes.

During the early 1990s when the Tory administration had to grapple with a recession the burden of spending cuts to tax rises was split roughly 50-50. The Tories have denied plans to increase VAT to 19.5 per cent, a measure that would yield a whopping £17bn in just two years. But it's likely to be too tempting in the medium term.

Efficiency savings are a core plank of the Tory manifesto. Mr Osborne expects to save more than £4bn alone from cutting spending on Whitehall and quango administration costs and advertising. But key imponderables remain within the manifesto. The IFS says that the Conservative plans imply cuts to spending on public services that have not been delivered over any five-year period since the Second World War.

Labour

Labour has set out a four-year deficit reduction plan to plug the gaping £160bn shortfall in public finances, which Gordon Brown last week described as offering fair tax rises and equitable spending cuts. According to the IFS, Labour's plan, which kicks into action one year later than the Tories, will deliver the toughest measures in the early years.

Labour has promised to halve the overall budget deficit by 2013/14 from the 2009/10 high point. Compared to the Conservatives, Labour's plan to tackle the deficit is more evenly split between spending cuts and tax hikes – around two to one.

The Chancellor, Alistair Darling, has already announced £17bn of tax increases into the system – roughly 1.2 per cent of national income – including controversial plans to hike employer NI contributions. Other tax measures include an increase in income tax for those earning over £100,000, which will raise £7.5bn, and more duty on booze, fags and petrol taxes, which should raise an extra £3bn. According to the IFS, the £17bn package of hikes equates to around £550 per family in the UK.

Spending cuts outlined by Labour imply an annual cut to public service expenditure of 1.8 per cent – the deepest reductions since 1976 – for the next four years. It means that spending on departments by Labour would be £47bn lower in 2014/15 than this year. Which departments will feel the deepest cuts remains uncertain.

Labour has made pledges to maintain non-investment spending on the NHS andeducation for the next two years. But after that the protection ends. Should Labour win on Thursday defence, higher education, transport and housing ministers seem to have most to worry about. None of these departments have the security of a protection pledge from No 11.

The Liberal Democrats

The LibDems, and particularly their economic spokesman Vince Cable, have tried to present themselves as being wholly honest about the savagery of cuts needed to rebuild the economy. On page 97 of the manifesto, the party states: "If we are to be able to deliver the radical changes proposed in this manifesto as well as restoring the health of the public finances, we must be honest with people about how these policies will be paid for."

The LibDems are proposing an estimated £19.7bn of cuts a year from 2011 to 2015, £3.9bn deeper than Labour and nearly double the Conservative plans. The party has made it plain that it considers timing vital, so that the cuts only take place from the point the economy is strong enough to handle less public spending. However, it believes that this should be as early as the next fiscal year.

An emergency spending review and Budget would take place by the end of June. This is an implicit criticism of Labour's decision to delay a comprehensive spending review until after the election, which many leading commentators believe should have been prepared several months ago as originally planned.

The most eye-catching LibDem policy actually hurts Treasury coffers. Described by the IFS as "one very large tax cut", the party plans to increase personal income tax allowance to £10,000. The policy would cost £16bn. This would be offset by tax rises elsewhere, such as a reforming air passenger duty raising £3.2bn, and benefit cuts, including the scrapping of child trust funds. Banks get hit heavily, with a levy on profits set to bring in £2bn to £3bn a year. The range of these measures means that the LibDems have the toughest savings and tax programme.

However, the IFS questions some of the party's assumptions. For example, the institute says that it is "unclear that enough resources would be freed up to combat £1.4bn of [tax] evasion". Some of the other concepts in the manifesto come across as vague, such as "cutting the cost of politics", which the party claims will save nearly £2bn between 2011 and 2015. Certainly civil servants should fear this idea, as, additionally, the party plans to scrap civil service bonuses.

Several of the big cuts come from reversing existing government proposals, particularly on civil liberties and defence. Nick Clegg's economics team believes that it can save an annual £155m by 2013/14 through ditching ID cards. Biometric passports would also go, which the party believes will save the Exchequer more than £1.8bn by 2015. Scrapping the next tranche of Eurofighter aircraft would save a further £510m a year from 2012/13.

According to the IFS, the overall shape of LibDem plans is more similar to Labour than the Tories. The distribution between spending cuts to tax rises is roughly 2.5:1, Labour is 2:1 and Cameron's team is looking at 4:1. The institute estimates that the LibDem's tax burden by 2016/17 would be lower than under Labour but greater than the Conservatives.

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