The possibility (some would even say probability) that the SNP could hold the balance of power after the election means Nicola Sturgeon’s speech at UCL this week merits scrutiny. In her address, the Scottish First Minister called for an end to “morally unjustifiable and economically unsustainable” austerity. Since this demand, as I noted on Wednesday, is shared with a significant number of Labour backbenchers it is one that Ed Miliband could struggle to fend off.
Sturgeon’s proposal to increase departmental spending by 0.5 per cent in real-terms for four years would mean an additional £180bn of expenditure across the next parliament compared to the coalition. How big a difference does this represent with Labour? As a valuable new analysis by the Resolution Foundation shows, the gap is not as great as some assume. Ed Balls has pledged to eliminate the current account deficit “as soon as possible” in the next parliament, refusing to name a particular date. Were Labour to balance the budget as early as 2017-18, the difference between the two parties would be large. But were it to wait until 2019-20, the gap would only be around £14bn (not significant when George Osborne has borrowed £200bn more than planned since 2010).
As the authors, Gavin Kelly and Adam Corlett, note: “The SNP proposal implies increases in total departmental spending of £1-2 billion per year over 4 years; whereas Labour’s 2019-20 scenario implies cuts of £1-2 billion per year over the same period. This is against total departmental spending of around £350 billion. By 2019-20 this difference adds up to roughly a £14 billion gap between the two parties. Now, that’s a real difference but given the scale of the numbers involved, (and the fact that some of Labour’s consolidation may come from tax increases rather than spending cuts), it’s also a relatively modest one.” In other words, the rhetorical differences may well be greater than the fiscal ones.
But the most pertinent point made by the analysis (and one all too often omitted from the current debate) is that the pace of deficit reduction in the next parliament will hinge on the performance of the economy: “None of the party leaders knows any better than you or I what will happen to productivity next year, never mind in 2020. Yet any difference between, say, the Labour and SNP spending plans would be dwarfed by the fiscal implications of even modest boosts (or dips) in productivity. Indeed, even the very large difference between the SNP (or Labour) and the coalition’s plans could be overshadowed by a significant shift in productivity trends.”
It’s for this reason that Labour’s decision to give itself greater flexibility than the Conservatives (pledging only to achieve a current surplus, rather than an absolute one, and to borrow for investment) is wise. Whether it needs to bargain with the SNP will depend on the post-election arithmetic and political circumstance. But that the potential exists for fiscal compromise is clear.
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