Labour Party manifesto: an initial response

Paul Johnson, IFS Director, said:

“This was not a manifesto for those looking for big numbers. The public service spending increases promised in the “costings” table are tiny, going on trivial. The tax rises, beyond the inevitable reduced tax avoidance, even more trivial. The biggest commitment, to the much vaunted “green prosperity plan”, comes in at no more than £5 billion a year, funded in part by borrowing and in part by “a windfall tax on the oil and gas giants”.

Beyond that, almost nothing in the way of definite promises on spending despite Labour diagnosing deep-seated problems across child poverty, homelessness, higher education funding, adult social care, local government finances, pensions and much more besides. Definite promises though not to do things. Not to have debt rising at the end of the forecast. Not to increase tax on working people. Not to increase rates of income tax, National Insurance, VAT or corporation tax.

One public service where there are big promises is on the NHS. Labour has recommitted to the workforce plan, to getting rid of all waiting times more than 18 weeks, and to more hospitals. Big promises, but that will require big spending too.

All that will leave Labour with a problem. On current forecasts, and especially with an extra £17.5 billion borrowing over five years to fund the green prosperity plan, this leaves literally no room – within the fiscal rule that Labour has signed up to – for any more spending than planned by the current government. And those plans do involve cuts both to investment spending and to spending on unprotected public services. Yet Sir Keir Starmer effectively ruled out such cuts. How they will square the circle in government we do not know.

Yes, growth could surprise on the upside – and if it does, then the fiscal arithmetic would be easier. But if it doesn’t – and it hasn’t tended to in recent years – then either we will get those cuts, or the fiscal targets will be fudged, or taxes will rise. The top-ups of £5 billion or so to day-to-day spending in the manifesto mostly pay for additional promises for the NHS and schools, rather than significantly reducing the scale of implied cuts to spending on unprotected public services. Like the Conservatives and the Liberal Democrats, Labour continues in a conspiracy of silence on the difficulties they would face. These challenges are already perfectly clear. The books are open. A post-election routine of shock-and-horror at the state of the public finances will not cut it.

The focus on economic growth and stability is, in this context, welcome. Planning reform, an effective industrial strategy, promises of regulatory reform, some education reform – all are needed. Details remain thin, but the focus looks broadly right. Better policy can lead to better growth, and there is plenty of room for better policy. But the growth would take time to arrive, and its scale is uncertain. The difficult choices for the coming Parliament will still be there.

This is a manifesto that promises a dizzying number of reviews and strategies to tackle some of the challenges facing the country. That is better than a shopping list of half-baked policy announcements. But delivering genuine change will almost certainly also require putting actual resources on the table. And Labour’s manifesto offers no indication that there is a plan for where the money would come from to finance this.”

Below we outline an initial response from IFS researchers on the Labour party’s manifesto. We take a number of policy areas by turn but this is not a full assessment. 

Further analysis will be published over the next two weeks.

Public finances

Isabel Stockton, a Senior Research Economist at IFS, said: 

“If there was one economic theme to the manifesto it was a welcome focus on growth. A sustained improvement in growth would make us better off, partly by taking the sharper edges off many of the fiscal trade-offs facing the next government. But even if achieved, faster growth would likely take time to materialise. Given that the manifesto doubles down on the commitment to get debt falling in the fifth year of the forecast, tough trade-offs on tax and spending are highly unlikely to simply disappear – trade-offs that the manifesto does not address. Labour's plan to borrow £17.5 billion over five years to fund an increase in green investment – whatever its inherent merits – would make that promise to get debt falling even harder to keep. Under the March 2024 forecast, it would have been just about possible without formally breaching the fiscal rule Labour has chosen to sign up to. If that remains the case come the Autumn, then whoever is Chancellor by then should consider themselves fortunate. What happens if they are less fortunate is not clear.”

• Labour has committed to two fiscal rules: one for debt and one for borrowing excluding investment spending. They have also re-stated a welcome commitment to one fiscal event a year accompanied by a forecast from the Office for Budget Responsibility. Under the March 2024 Budget forecasts, the most constraining rule is that debt as a share of national income should be forecast to be lower in five years' time than in four years' time. This is exactly the same rule that the Conservatives are signed up to – despite Labour’s manifesto claiming to mark “a clear break” from the Conservatives’ fiscal rules. It is an arbitrary and gameable rule, and it makes no distinction as to whether debt is the result of borrowing for investment or borrowing to cover day-to-day spending.
• A modest boost to day-to-day spending on public services of almost £5 billion a year would, under the manifesto proposals, be slightly more than matched by a modest tax rise. Higher investment spending to fund the climate policy would mean more borrowing, but on a scale small enough to just about be consistent with the fiscal rule on March’s forecasts.
• Of course, growth could turn out better than expected and we should all hope that it does. But, while quite appropriate to hope for the best, it is essential to plan for other possible outcomes – especially since the OBR is already at the more optimistic end of independent forecasters. This manifesto gives little indication whether, if the growth outlook deteriorated, a Labour government would choose to cut spending even further, raise taxes by more or allow debt to rise for longer.

Taxes

Helen Miller, IFS Deputy Director, said:

“There were no tax surprises in Labour’s manifesto. The biggest promises were the negative ones: no increases in rates of income tax, NI, VAT or corporation tax. The positive ones were small: permanent measures scored as raising just over £7 billion per year. Most of that would, according to the plan, come from reduced tax avoidance - a theme common to the manifestos of all three main UK-wide parties. As ever, this should be considered an uncertain revenue source. It will be particularly hard to get the desired revenue if Labour really mean that they want to raise all of the additional money from limiting (legal) avoidance opportunities, and not (illegal) evasion, which isn’t mentioned in the manifesto.

Labour have committed not to increase NICs or VAT, the basic, higher or additional rates of income tax or the main rate of corporation tax. While choosing not to increase tax overall is a legitimate political choice, pledges not to increase a wide range of specific taxes are problematic: they restrict a government’s ability to respond to changing circumstances and can seriously hamper tax reform. At least Labour didn’t tie their hands any further. And the wording of the income tax pledge leaves some room for measures that would increase income tax revenues, or for reform to parts of income tax, if desired.

Other than a pledge to replace business rates with an unspecified new system, the manifesto sets out no vision for substantive tax reform. There is no shortage of opportunities to make the tax system fairer and more conducive to growth. The hope must be that, if elected, the Labour party in government would be more ambitious than this.”

• Labour are proposing to raise just over £6 billion across the next parliament through increasing and extending the Energy Profits Levy - a ‘windfall’ tax on the profits of oil and gas companies. Labour acknowledge that this revenue would be temporary. Rather than frequent change it would be preferable to get a long-term regime in place. This could include permanently higher tax rates that would lead to higher tax revenues when oil prices are high without the need for windfall taxes.
• Labour have confirmed their plan to remove tax exemptions from private schools, which includes adding VAT to private school fees and ending the relief on business rates. They assume this will raise about £1.5 billion per year, which is in line with our previous estimates suggesting that such a policy would raise about £1.3-1.5 billion, after accounting for the cost of a small migration of pupils to the state sector. As discussed in our previous analysis of this issue, the arguments for keeping or removing these exemptions are finely balanced.
• The manifesto does not set out exactly how Labour would close the carried interest ‘loophole’. The amount they expect to raise from higher taxes on private equity bosses is relatively small – around half a billion per year. But this would represent a relatively large tax increase for some people. Official numbers suggest that there are only around 3,000 people receiving carried interest each year. Some of them are non-doms and therefore would also see their taxes increase as a result of changes to the non-dom regime, including those that are already planned and the additional reforms that the Labour party would make on top.

Public service spending

Bee Boileau, Research Economist at IFS, said: 

“Labour’s manifesto did promise some changes to planned day-to-day spending on public services, topping up planned spending totals in 2028–29 by almost £5 billion. But these funds are paying for a range of specific commitments, largely in health and education. Absent money found for unprotected services – areas like further education, prisons, and criminal courts – these areas are still likely to be seriously squeezed, facing real-terms cuts that look inconsistent with the manifesto’s stated ambitions in these areas. The manifesto confirmed Labour’s green investment plans, which represent a genuine boost to public investment compared to existing plans. But even these will leave non-green investment falling in real terms and as a share of national income.”

• The top-up to day-to-day spending on public services would be around £5 billion in 2028–29. This is relatively modest, meaning overall day-to-day spending after this year is now set to grow annually by 1.2% on average in real terms, rather than 1% each year under current government plans. This would be insufficient to avoid real-terms cuts in some areas of spending, especially since much of the additional money is earmarked for ‘protected’ areas – in particular, the NHS and schools.
• It is hard to judge exactly what this additional spending means for different areas, since we do not have detailed plans for departmental spending after this year and so have no detail on what ‘additional’ funding commitments are relative to.
• After the Spring Budget, we estimated that ‘unprotected’ departments would face real-terms cuts of around 1.9% to 3.5% each year over the next parliament, and a top-up of £10 to £20 billion in 2028–29 would be needed to avoid these. This was assuming that total schools funding was held flat in real terms, that defence and aid spending grew with national income, that the NHS budget grew at 3.6% each year (which we have estimated would be necessary to meet the ambitions of the long-term workforce plan), and that new childcare commitments were funded in line with March 2023 plans.
• If Labour’s additional £1.8 billion for the NHS is part of what is required to deliver the long-term workforce plan, which we have already assumed would be funded, then the money could ease implied cuts elsewhere (with the NHS budget continuing to grow at 3.6% each year). But promised schools funding all appears to be aimed at specific programmes that increase schools’ responsibilities (rather than offsetting pressures on core services), so additional promises could be seen as coming on top of the baseline funding we have assumed for schools. In this scenario, ‘unprotected’ areas would instead face real-terms cuts of between 1.2% and 2.9%, needing a top-up of £6 to £16 billion in 2028–29 to be avoided. This would be slightly under half the scale of cuts to these areas under the coalition government of the 2010s, which were around 5.4% each year.
• Given the performance of many public services and pressures on spending it is hard to see how these real-terms cuts can be made each year without a significant worsening in performance or a scaling back of what the state currently provides. It seems more likely that money will be found from somewhere. We are not told from where.
• The manifesto promised a boost to green investment, committing to spending an additional £23.7 billion over the course of the parliament; an average of £4.7 billion a year. We currently spend around £8 billion on emissions-related spending, so Labour’s commitment in this area does represent a significant increase. But this plan still leaves total investment falling sharply – in real terms, and as a share of national income – over the course of the next parliament, albeit from a relatively high level. And the additional investment that Labour has promised is all earmarked for green projects – non-green investment would be frozen in cash terms.

Health and social care

Max Warner, Research Economist at IFS, said:

“The Labour Party manifesto commits to improving NHS performance substantially, with a focus on eliminating elective waiting times above 18 weeks by the end of the next parliament. If achieved, this would represent a major improvement, undoing nearly a decade of worsening in NHS waiting times in just five years. The manifesto also promises to deliver the NHS Long Term Workforce Plan and the New Hospitals Programme. But delivering on all these promises would be expensive: it would almost certainly require real-terms funding growth upwards of 3% per year. Beyond some small amounts of ‘additional’ funding, the Labour manifesto provides no detail about the overall funding the NHS will receive in the next parliament. This makes it impossible to judge whether meeting these commitments is credible. New Labour governments improved NHS performance dramatically in the 2000s, but this was alongside rapid funding growth, of about 7% per year in real terms, delivered in a very different fiscal climate.”

• The Labour Party has not set out an overall spending plan for health and social care in England. This makes it impossible to judge the plausibility of the party’s plans for cutting waiting times, increasing the workforce and building new hospitals. Achieving the promises in the manifesto will require the NHS budget to grow substantially faster than inflation over the next parliament, almost certainly needing growth of upwards of 3% above inflation each year.
• The manifesto does set out £1.8 billion (cash terms) in additional spending per year by 2028–29 for specific pledges. This covers previously announced policies including doubling the number of CT and MRI scanners in the NHS and recruiting 8,500 new mental health staff. But this additional spending is worth less than 1% of the £192 billion spent on health and social care in England this financial year.
• The manifesto reiterates the commitment to return NHS waiting times to the 18 week target; in April, 3.2 million treatment pathways had already lasted longer than this. There is no deadline specified for the first step of providing 40,000 extra appointments, scans and operations each week. But if and when this is achieved, it would represent a small but noticeable increase in NHS activity (around 1.5% extra relative to NHS activity in 2023-24). Such an increase in hospital activity would be smaller than the annual growth in demand pressures forecast by the government’s Long-Term Workforce Plan (2.1% per year). As a result, it will be far from enough to achieve the target on its own.
• The manifesto commits to major reforms in adult social care, but provides next to no detail on how or when these would be implemented, or what final form they would take. This includes a commitment to create a “National Care Service” and to introduce a collective pay agreement in adult social care. With no specific funding set aside for these changes, paying for them would mean less for other services, unless taxes or borrowing were increased.

Education

Christine Farquharson, Associate Director at IFS, said: 

“The Labour manifesto identifies a whole series of challenges on education: burnt-out teachers, skyrocketing school absences, deficiencies in the special needs system, challenges with childcare availability, widespread skill shortages and a higher education system in crisis. But the resources offered up to deal with these issues were mostly small, and targeted at specific new proposals. Key details on core spending were missing.

The biggest commitment was to recruit an additional 6,500 secondary school teachers, but this is only about half of the 13,000 shortfall in recruitment last year. £315 million for school breakfast clubs will expand existing provision to all primary schools, and make funding permanent. The £175 million for mental health support in schools will boost spending on young people’s mental health by 15%.

There were no commitments on core school and college funding, nor on higher education funding. This offers even less certainty than the Conservative or Liberal Democrat manifestos (which promised to at least protect per-pupil spending in real terms).

We don’t know anything about how a Labour government would change the higher education funding system, even though Labour state that this system doesn’t currently work for taxpayers, students or universities.”

• As with health and social care, Labour made no overall commitments on school or college funding for the next parliament. We, and schools, are left with no sense of what might happen to budgets. The party did make a range of smaller spending commitments, including on teacher recruitment and training; breakfast clubs; and mental health support.
• If delivered, Labour’s pledge to recruit an additional 6,500 teachers in England would boost the secondary school teacher workforce by around 3%. But the manifesto provided little detail on how these teachers would actually be recruited: amidst an ongoing squeeze on teacher pay, England recruited around 13,000 fewer secondary school teachers than its target in 2023-24. These recruitment challenges are particularly acute in the specialist subjects and disadvantaged areas that Labour says it will target.
• The Labour Party has not outlined any plans for how it would address the ‘crisis’ it identifies in higher education. There are no easy ways to boost funding for students and universities without extra cost to the taxpayer or to at least some graduates. For example, maintaining the tuition fee freeze indefinitely would constitute a further real-terms cut to university funding of £1.8 billion per year by 2029, but allowing the freeze to expire - as it is set to do in 2025 - would see tuition fees hit £10,500 by the same year.
• Labour’s proposal to guarantee free breakfast clubs in all English primary schools would make breakfast club provision permanent and universal. Note that the food provided by the existing National School Breakfast Programme only costs around £40 per pupil taking up the offer per year (21p a day).
• Labour has, sensibly, looked for opportunities to reshape the skills sector without yet another radical shake-up. Their flagship policy to replace the existing apprenticeship levy with a ‘Growth and Skills Levy’ offers employers additional flexibility to use the money for training that they are already required to pay in. Setting up a new national body to coordinate England’s skills strategy could help to develop training and courses that better address local skills shortages. But, without any commitments to additional funding for colleges or vocational education, these new strategies and commitments will need to be delivered by a sector that has seen 28% cuts since 2010.
• Labour’s most consequential decision in the early years area was signing up to the current government’s plans to expand eligibility for free childcare to all children in ‘working’ families from 9 months on. This £4 billion per year policy will see childcare spending double between 2023 and 2026. Set against this, £35 million a year in capital spending to convert classrooms into nurseries may smooth the path to delivery, but is a nudge rather than a radical shift in the early years landscape.

Working-age benefits and labour market policy

Tom Waters, an Associate Director at IFS, said: 

“Like many other areas of Labour’s manifesto, there is a bold statement of ambition to reduce poverty alongside policies that typically imply little cost to government - in this case, higher minimum wages, more labour market regulation, and promises to review things. Contrastingly, there is no mention of reversing specific benefit cuts that Labour have in the past opposed, including the two-child limit, whose effects are very tightly targeted on low-income families. There’s nothing wrong with looking at a broad range of policies - and it is certainly sensible not to fixate only on benefits - but it is likely that meeting the bold aims laid out would in reality require extra spending that is not spelt out.”

• The manifesto contains no concrete policies on benefits. Labour say they would “review Universal Credit so that it makes work pay and tackles poverty” and allude to a plan to reform or replace the assessment that determines eligibility for incapacity benefits. There is however no reference to any of the cuts of the past fourteen years - including the two-child limit, benefit cap and “bedroom tax”, which Labour pledged to scrap in their 2019 manifesto (and which today would cost about £4 billion a year to reverse). Labour nevertheless promise an “ambitious strategy to reduce child poverty.” Raising benefits is certainly not the only way to deal with child poverty, but it is the most direct and immediate tool, and one that governments have often turned to. The rise in child poverty since 2010 is entirely concentrated in families with three or more children, who have been particularly targeted by benefit cuts. The few specific policies outlined (including free breakfast clubs and eviction protections) would make very little difference to income poverty. The manifesto also does not give us any clear idea on whether Labour will accept the rapidly rising health-related benefit bill, or in some way tighten the system to keep costs down.
• Minimum wages. Labour have committed to extending the National Living Wage (NLW; which applies to workers aged 21 and over) to cover workers aged 18 to 20. 350,000 18- to 20-year-olds - 38% of all 18- to 20-year-old employees - currently earn below this level. Existing research on the minimum wage suggests that the risks of job loss from raising young people’s minimum wages are greater than for older workers, so there is a case for making this adjustment gradually to allow for its effects to be carefully monitored.
• Labour have also committed to making the NLW a ‘genuine living wage’, linked somehow to the cost of living. It is unclear what this means. One possibility is that the NLW is effectively just raised to be equal to the voluntary living wage calculated by the Living Wage Foundation, based on measures of the cost of living. This would imply an increase of 56 pence, or 5%, from where the NLW is now. For context, since April 2014 the statutory minimum wage has grown by 36% in real terms. Alternatively, the intention may be to simply ask the Low Pay Commission to consider price growth alongside wage growth when recommending the National Living Wage - the impacts of which would likely be small.
• Labour market regulation. Labour’s proposed package of employment rights includes extending protection against unfair dismissal to employees with a tenure of less than two years, so that all employees are covered. The intention is to provide new employees with more job security. The likely trade-off is that, by making it harder to reverse hiring decisions, unproductive worker-job matches persist for longer and employers are more reluctant to hire workers that they consider riskier (e.g.  younger, less experienced ones).
• The proposed ban on “exploitative zero-hours contracts” is, in practice, not a total ban, but a right for employees to move to a contract reflecting their average hours. This would, again, increase certainty for workers, while restricting the flexibility of labour inputs for employers and hence make some employment less attractive from their point of view.