Labour manifesto comes with big risks but costs may be worth it

Labour’s manifesto was accompanied by a document that detailed what the pledges would cost and how the money would be raised for them.

At £82.9bn in additional spending on public services by 2023-24 – and with a package of tax increases to match – the pledges are almost double the £48.6bn outlined by the party in 2017.

It outguns the £62.9bn in the Liberal Democrats’ package, but is well short of the £1.2tn the Conservatives say would be the cost of a Jeremy Corbyn government.

Taken together with a plan to invest £400bn in infrastructure, the Resolution Foundation thinktank said the manifesto implied extra spending of £135bn. This would take government spending as a share of national income to highest level since the second world war.

Labour said high earners and companies would shoulder the burden and that it would freeze income tax and national insurance for everyone else. At first glance, the party is correct.

The plan would bring in an extra £5.4bn though tax rises for those paid more than £80,000 a year – the top 5% of earners in Britain. However, analysts warned other tax changes may end up affecting those outside the top bracket.

Only 6% of the total £82.9bn would be brought in by raising income tax, while the Institute for Fiscal Studies (IFS) said targeting a wider tax base could be better way to pay for a transformational budget. “It would be a mistake to think of this as falling entirely on the rich,” the economics thinktank added.

Critics could argue the income tax plan is at the optimistic end of forecasts. The IFS said this week that about £3bn a year could be brought in from Labour’s plan, on a scale where £6bn was the best-case scenario and a £1bn loss was the worst, depending on how high earners react to the changes.

However, changes to wealth taxes could make the tax harder to avoid. Labour said it would lift the rate of capital gains tax, paid on the sale of assets, in line with income tax rates. At present, high earners have an opportunity to avoid income tax by using company dividends, which are taxed as capital gains.

The party’s plan to raise corporation tax to 26%, which would generate an extra £23.7bn, appears to bring Britain into line with many other EU countries while keeping it below the 28% rate when the Tories came to power in 2010.

The IFS said the rise would mean the highest corporate tax as a percentage of GDP in the G7 – and more than in almost all other Organisation for Economic Co-operation and Development countries. The thinktank also said company taxes can trickle down to consumers. Paul Johnson, the IFS director, said: “The truth is of course that in the end corporation tax is paid by workers, customers or shareholders so would affect many in the population.”

Labour’s plan comes with substantial risks. However, the party argues the jump is necessary to repair the damage of austerity and to tackle the climate emergency.