Labour’s Rachel Reeves has scored some political points this week by claiming that the Conservatives have made £71 billion of “unfunded policy pledges”, and that this will “mean £4,800 on your mortgage”. But these calculations are simply absurd and easy to knock down.
Let us start with the ‘£71 billion’. This figure first appeared in a Labour document, called ‘Conservatives Interest Rate Rise’, published in May. It was claimed then that annual borrowing would be £71 billion higher in the final year of the next parliament (2029-30), based on Labour’s costings of the Conservatives’ alleged plans.
However, this analysis unravelled when the Conservatives actually published their manifesto. In particular, Labour’s original costings for 2029-30 included £46 billion for the complete abolition of National Insurance (NI). In the event, the manifesto only committed to scrap NI for the self-employed, and to another 2p cut for employees. The rest would only follow “when we have a way to fund it sustainably, consistent with getting debt and borrowing down”.
The second largest item in Labour’s costings was nearly £10 billion for the abolition of Inheritance Tax – which did not make the Conservatives manifesto at all.
Labour have therefore had to redo their analysis. This week they publishing a new version, called ‘Tory Manifesto – the money’s not there’. This estimated the ‘unfunded pledges’ at a little over £17 billion in 2029-30. You can see the problem straightaway: that figure is not even close to the original £71 billion.
But rather than starting from scratch, Labour have doubled down on the £71 billion. They have done this by redefining it as the sum of the ‘unfunded promises’ over the full five years, rather than the final year alone. By an astonishing coincidence, Labour also puts this figure at £71 billion, even though it is calculated on a completely different basis. What are the chances, eh?
The jiggery-pokery does not stop there. Labour have also conjured up an estimate of the impact of increased borrowing on mortgage interest rates. For this, they have assumed that a rise in borrowing equivalent to 1 per cent of national income (GDP) would add 1.25 percentage points to mortgage rates.
In the May document, Labour said that a £71 billion rise in borrowing would be equivalent to around 2 per cent of GDP, meaning interest rates could rise by around 2.5 percentage points. This figure was then applied to a mortgage on the average UK house worth £285,000, assuming a 20 per cent deposit. Labour concluded that monthly mortgage payments would rise by £350 (or £4,200 a year). I have been unable to replicate these calculations (perhaps they have made some sophisticated assumptions about repayment mortgages, but this is not clear).
The June version is slightly different. The £71 billion is now spread over five years, equivalent to around 0.4 per cent of GDP each year. For no obvious reason, Labour has upped the estimated impact on interest rates to 2.8 percentage points in total. They then applied this to a different mortgage (85%, rather than 80%) to arrive at a new figure of £4,800. These calculations look iffy too.
Dodgy maths aside, the economics does not stack up either. The Treasury analysis on which these figures are based actually said that the impact on rates from a rise in borrowing of 1 per cent of GDP could be between 0.5 and 1.25 percentage points. Labour have therefore picked the top of a wide range. Even then, the Treasury noted that this ‘range is higher than those found in external literature’.
Moreover, this is the ‘peak impact’ on official interest rates, which would not necessarily feed one-for-one to mortgagerates, especially where people are on longer-term fixes. Finally, this ignores any supply-side benefits from the Conservative’s fiscal measures, notably the potential boost to the labour force from reducing NI (a tax on work).
Remarkably also, Labour’s shifting analysis implies that £71 billion of additional borrowing would have a larger impact on interest rates if spread over five years (2.8 percentage points) than if the same amount happened in a single year (2.5 percentage points). That makes no sense at all.
Finally, I have not even begun to challenge the underlying assumptions behind the costings of the ‘unfunded pledges’, but many of them look fishy too. For example, the latest version of Labour’s £71 billion assumes that the Conservatives welfare reforms, expected to save up to £12 billion a year, will actually have no impact whatsoever.
Does any of this matter? Some will say this is just par for the course during an election campaign, and the Conservatives are hardly squeaky clean either. But in my view, this skullduggery goes well beyond the potentially misleading way that the Conservative have presented their claim that Labour will “increase your taxes by £2,094”. That figure was at least based on conservative assumptions, with a small ‘c’, and the numbers added up. (See my earlier blog on this.)
All in all, it is hard to escape the conclusion that having made up some dodgy numbers, Labour decided to stick with them regardless of what was actually in the Conservative manifesto. Endorsing this half-baked analysis does not reflect well on a former Bank of England economist and would-be Chancellor.
This piece was published by The Spectator on 16 June 2024
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