The Liberal Democrats have unveiled a manifesto that is what we’ve come to expect from the party: it’s heavy on centre-left policy commitments, with plenty of major interventions in the economy to support small businesses and new industries, while stepping back from seeking to directly run them, with higher funding for health and education, with a 1p rise in all income tax rates, and a plan to legalise and tax cannabis usage.
There are two genuine points of difference between this manifesto and that of Tim Farron in 2017: the first is shadow finance spokesperson Ed Davey’s new fiscal rule, which, like John McDonnell and Sajid Javid’s, is designed to take account of what may be the new normal of semi-permanent low interest rates. Like Labour and the Conservatives, Davey’s rule commits him to a balanced budget for day-to-day spending but carves out an exemption for infrastructure. Unlike both, it commits to ensuring that the national debt falls as a share of GDP day-to-day, while both the Chancellor and his shadow have committed to keep either falling or flat, unlocking billions of additional spending. Davey’s rule is a sensible one trying to pretend that it is stupid: the Liberal Democrats want the freedom to spend more, particularly in a downturn, as well as the plaudits of being the country’s last “fiscally responsible” party.
But that tight fiscal straitjacket means that the Liberal Democrats have less to spend than other parties, which means they have more tax rises than the Conservatives — and less public spending than Labour. They will hope that their target audience sees that as a good thing – but it means that they have had to resort to some clever accounting to get a headline today: they are comparing their proposed spending on education in 2024-5 with Conservative projections for spending in 2019-20: quite a big difference, giving them a headline from most outlets about “£10bn extra a year” when in practice they are increasing education spending by £7.6bn a year compared to today – just half a billion more than the amount the Tories have proposed to spend (though, because of their looser rules about infrastructure spending, they can regenerate the schools estate at will).
Like McDonnell’s rule, but unlike Javid’s, it contains a get-out in the event of an economic downturn, allowing the Liberal Democrats to spend more in a recession. A fiscal rule without a provision for what you’d do differently in a downturn is no fiscal rule at all: it’s like being licensed to drive a car provided there’s no fuel in it — it may be useful to you for the majority of the day, but when you actually need your car you’ll find it’s pretty silly. Having a fiscal rule that only provides economic certainty when the economy is growing is similarly pointless.
Javid’s rule is a stupid one trying to pretend that it is sensible: giving the Conservatives the freedom to borrow and spend more but theoretically committing them to more austerity when the economy is shrinking. But the important thing for the Liberal Democrats is that their fiscal rule, like Labour’s, means they need to find a lot more tax revenue somewhere if they are to fund their commitments.
The second point of difference is closely connected to that factor: the “Remain bonus” — the amount that the party estimates tax revenues will increase by due to cancelling Brexit, which they say will increase investment and ease business uncertainty, boosting the amount collected in tax receipts. The politics of it are pretty smart in that it ties the Liberal Democrats’ spending commitments to what the party believes is its biggest asset in this election — its commitment to stopping Brexit. It allows them to tie back every interview to that central point.
But is the policy reasonable? Well, it depends on your underlying assumptions. Most economists estimate that staying in the European Union will result in an economy that is larger and grows faster compared to the economic picture if we go through with Brexit. But the expected feelgood factor depends as much on the circumstances in which Brexit is cancelled. Imagine, for a moment, that the Liberal Democrats achieve a parliamentary majority with 35 per cent of the vote. In addition to revoking Article 50, that government would legislate to change the electoral system, making it much less likely that a pro-Leave majority would emerge in parliament afterwards. In that situation, the Remain bonus looks likely to be cautious, perhaps even understated.
Now imagine for a moment that Brexit is stopped because an alliance of pro-Remain parties in parliament legislates for a referendum and wins it with say 55 per cent of the vote, while the Conservatives, now back in opposition, become an entirely committed party of Leave. It seems unlikely that in that situation that the Remain bonus would arrive — or, at least, not in the quantities the Liberal Democrats require.