2001 election briefing

IFS has published the first six notes in its Election Briefing Note (EBN) series. These look backwards over the last four years and compare the Parliament just ending with earlier Parliaments. There are six Briefing Notes, all available to download here free of charge. Once the main parties\' manifestos have been published, we will publish further Election Briefing Notes analysing their content.

Overall tax and spending(EBN2)
Between 1996-97 and 2000-01, government revenues have risen by 2.9% of GDP from 37.6% to 40.5%, while spending has decreased from 41.2% of GDP to 38.8%. As a consequence, over this four-year period, public sector net borrowing fell by a total of 5.3% of GDP, moving from large deficit to large surplus.

Changes in taxation and spending, different periods

Source: IFS Election Briefing Note 2.

The table shows the movements in taxation and spending seen since 1979. During the Conservative years, the economy grew at an average of 2.1% per year, implying that both tax and public spending fell as a share of national income. In the last four years, taxes have risen as a share of national income but spending has fallen. Part of this is explained by a rapidly growing economy, which tends to boost taxation receipts and depress spending.

Spending on public services (EBN3)

Although overall public spending has grown slowly in the last four years, spending in some areas - most notably health and education - has grown significantly more rapidly than in the 18 years of Conservative government that preceded this Parliament. This has been possible in spite of an overall reduction in spending as a share of national income because of particularly slow growth in social security spending and a reduction in debt interest payments.

Public spending grew significantly more quickly in the last year of the Parliament than in the previous three, and is planned to grow quite rapidly over the next three years.

Public sector investment spending, which had fallen in the years before the last election, has fallen further as a share of national income and in real terms, despite the government\'s intention to increase it.

Living standards under Labour (EBN4)

Actual living standards are the result of not just changes to the tax and benefit system, but also changes to the underlying distribution of income. Data to examine this are only available for the first three years of the Labour government.

During this period, the incomes of the poorest fifth of households grew at an average annual rate of 1.4%, with subsequent fifths growing respectively at 1.5%, 1.8%, 2.4% and 2.8%. Although the direct effect of government measures was to reduce inequality, the underlying distribution of income widened by enough to more than offset the effects of tax and benefit changes in the first three years of the Parliament.

Fiscal reforms affecting households (EBN5)

We have modelled the impact of changes to the tax and benefit system as it affects households. Many of the tax increases seen in recent years cannot readily be included, most notably the increased taxation on company incomes and pension fund dividends. We have assumed in these calculations that all entitlements to means-tested benefits are taken up, which they are not, which should be borne in mind in interpreting the results. The broad pattern of the results is unaffected by this.

Effect of major fiscal reforms implemented July 1997 to June 2001

Note: The first decile contains the poorest 10% of the population, while the tenth decile contains the richest 10%.
Source: IFS Election Briefing Note 5.

The figure shows gains concentrated on lower incomes. The substantial gains at the bottom end are mainly a result of higher means-tested benefits, especially for pensioners and families with children. Reforms to National Insurance contributions have also helped those on lower earnings. It is important to remember that while, on average, families in each decile gain, some families within each decile lose from the reforms, often because of indirect taxes.

Labour and business tax (EBN6)

The Labour government has cut the main corporation tax rate from 33% to 30%, abolished advance corporation tax, removed repayable dividend tax credits from pension funds, and moved to a quarterly system of tax payments for large firms. The combined effect of these changes has been to raise significant revenue during this Parliament, but in a way that is largely temporary, giving a boost to revenues during the Parliament just ending which will not be available in the longer term.