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06 Jun 2017

The Good, the Bad and the Ugly: Manifestos Reviewed

General Election Manifestos

We’re now in the closing stages of the 2017 General Election campaign. The parties have released their manifestos, their leaders have clashed in debates (well, some of them, anyway) and closing arguments are being aired.

In this post, we’re going to analyse the parties’ business policies, since they have the greatest potential impact on us and the Khaos Family, and offer an update to where we think the election’s headed overall.

Conservatives

Theresa May’s Conservative Party has significantly departed from David Cameron’s. In prior campaigns, deficit reduction, reducing the amount the Government borrows, was the leitmotif. The primary economic mission that eclipsed all else. In 2010, Conservatives promised a balanced budget by 2015. In 2015, they promised one by 2020. Now, just two years on under May, the promise has been pushed back eight years – to 2025.

If borne out, the UK will have endured the longest period of continuous borrowing since the Napoleonic War in the early 19th Century.

Gone too is Cameron’s triple tax lock – that he wouldn’t raise VAT, income tax or national insurance contributions (NICs). Only the commitment not to hike up VAT remains. We saw the Government enact an embarrassing U-turn over its wish to raise NICs for the self-employed, largely because it clashed with the ethos of Cameron’s lock, pledged in 2015. The Conservatives’ manifesto this time frees them to have another go, in keeping with a fresh mandate.

So, what else on tax and spend?

It’s not all tax rises. Corporation tax would decline to 17%, the personal income allowance would continue its upwards march to £12,500 and the upper rate’s threshold would reach £50,000 – all by 2020.

On red tape, the Government would oversee a ‘One-In-Two-Out Rule’ that means a new regulation can only be introduced if another, older, two are removed. It’s a policy of President Trump’s and has already led to substantially fewer regulations since his inauguration than under President Obama in the same time.

Business rates would be reformed, with more frequent valuations, meaning businesses would face fewer steep rate changes.

And the National Living Wage would increase, with a view to getting to 60% of median earnings by the close of the decade.

Lastly, regarding Brexit, the Conservatives are hoping to lead the UK out of the Single Market and Customs Union. Britain would then be free to negotiate its own free trade deals with only those firms that exported to the EU having to observe its rules and regulations.

Labour

Under Jeremy Corbyn, the Labour Party has also been on a journey. It’s hard to believe that just over 20 years ago Tony Blair romped to landslide victory on a ticket that pledged balancing the books (fully realised before the spending spigot opened in 2002) and to leave the upper rate of income tax untouched at 40% (lower than under seven years of Conservative rule since 2010). While not as radical as previous post-war manifestos, those of 1983 and 1974 are arguably to the left of 2017’s, it’s hard to deny Labour has returned to its tax and spend instincts. Labour wants the state to do more and isn’t afraid to say this will come with a price tag.

So, what taxes does Labour want to put up and by how much?

Aiming to rake in an extra £48.6 billion annually, Corbyn’s Labour aspires to tax the richest 5%’s income, put corporation tax up to 26% from 19%, reintroduce the lower small-business corporation rate, and tax income at 45% from £80,000, rather than £150,000. The 50p tax rate, hopes the party, would be brought back on earnings above £123,000.

But Labour’s higher taxes, say the Institute for Fiscal Studies, would not keep par with their spending commitments, being based off optimistic assumptions. Instead, there’ll be something like a £9 billion shortfall, likely to be made up with borrowing. That makes a balanced budget even more distant a prospect than under the Conservatives.

Elsewhere, Labour are promising a £10 minimum wage by 2020, the end of zero hour contracts and unpaid internships.

On negotiating Brexit, the party would unilaterally declare the right of EU citizens to stay while rejecting the prospect of no deal. That which is agreed would be shaped by Labour’s desire to retain maximum benefits from the Single Market and Customs Union.

Liberal Democrats

It’s also ‘back to the future’ with Tim Farron’s Liberal Democrats, who’ve tacked back to the days of their former leader, Charles Kennedy. In the 2001 General Election, his party pledged to put up income tax by 1p in the pound to help pay for better public services. So it is in 2017, with the extra cash to help pay for the NHS and social care.

And that’s not all. They are also planning to unwind recent cuts made to corporation, inheritance and capital gains tax, some of which were made when they were in coalition with the Conservatives over 2010-5. Second home owners would face 200% council tax on their additional property. Business rates would be reviewed.

Providing some respite, the party aspires to raise the employee national insurance threshold to the income tax threshold.

The Liberal Democrats’ Brexit stance favours continued Single Market and Customs Union membership, putting the negotiation’s outcome to a second referendum. If the public rejected the settlement, Britain would remain an EU member.

Our Take

Any which way you turn, it seems, a vote for one of the main three parties is a vote for a bigger state – the direction of travel doesn’t vary, only the speed to that destination.

A direct consequence of this is tax rates, as a proportion of GDP, will reach historic highs. Under the Conservatives, they’ll be at a 50-year high. Under Labour, a 70-year high. The Liberal Democrats fall somewhere in-between.

We think that’s unfortunate. While few of us wouldn’t want the public services the state provides, from education of our children to treatment of our sick, nor should taxes reach so high a level that businesses flee abroad to pay less, and entrepreneurs are discouraged from bringing new goods and services to market. That ultimately harms the private sector, that part of the economy that generates, rather than consumes, wealth and will naturally lead to less tax revenue. It means we can’t hire as many people, or invest as much in Khaos Control’s development, as we’d like. And we’re sure higher taxes will damage your business prospects too. As a broad rule, taxes should be low and simple.

And forever delaying balanced books, so the Government doesn’t borrow a penny, isn’t going to help. Borrowing is taxation deferred, paid directly with taxes like income tax or VAT, or indirectly with inflation that silently erodes purchasing power. We’ve already seen that many parties’ figures don’t add up, whacking up taxes alone isn’t going to be enough to fund their agendas, so the hole will be filled with borrowed money. All it would take is another recession, sharply reducing the amount flowing into the Government’s coffers, and Britain would be tottering on the edge of bankruptcy.

So, the main parties’ manifestos are disappointing – if they’re radical, they’re radical in the wrong direction. Why not, for example, combine income tax and NICs, making accounting simpler and it more apparent what the Government’s taxing us? Why not scrap corporation tax, since it’s hard to pin down how much profit corporates makes and where, and replace it with higher rates on dividends as these are strongly related to performance? And why not abolish council tax, stamp duty and business rates, and roll them all in to a single land value tax that would be fair, efficient and encourage development?

And Lastly, a Prediction

So, that’s our review of the business side of the parties’ manifestos. All polls have narrowed since we put up our blog post anticipating the General Election’s outcome, but the Conservative lead varies wildly, from as much as over 10% to as little as 1%. That means that, while the Conservatives will almost certainly win the most seats, the range of outcomes spans not winning a majority to romping home in a Thatcher-style landslide.

Traditionally, Conservatives tend to beat expectations on the day and are helped by strong turnout amongst the elderly that overwhelmingly support them, but this conflicts with a rule in recent elections – that the conventional wisdom going in is almost always wrong (think 2015 General Election, Brexit and Trump). This time, the conventional wisdom is a Conservative majority in the order of 56-80 seats, as expressed by most forecasters. That looks optimistic and that it’s factoring in that Conservatives will do better on the day. So, either way, one or the other rule will be disproved. Either the Conservatives do well, disproving the rule that conventional wisdom is almost always wrong, or they do badly, disproving the rule that they ultimately tend to do better.

When you factor in:

  • The steep decline in the Prime Minister’s favourability ratings, such that she has only a modest advantage over Corbyn
  • That Corbyn’s manifesto contains popular policies
  • That May’s is unpopular with the elderly, who she needs to turn out for her
  • That former UKIP voters are increasingly considering Labour, reversing a mass exodus to the Conservatives alone
  • That search volume and social media sentiment analysis favour Labour
  • And that this is, in some ways, an establishment (May) vs. anti-establishment (Corbyn) election, where voters may express fatigue with the Conservatives who’ve been in power seven years, and so want change

We think the result is going to be much closer than first anticipated, with the Conservatives looking to gain no more than 15 seats net and possibly even lose some overall to the point Parliament’s hung. 60% chance of a modest Conservative majority, 40% of a hung Parliament.

A bold prediction! Hopefully, it ages well….

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