Good morning from New Economy Brief.

During the 2022 Conservative Party leadership election, Rishi Sunak said his opponent Liz Truss’ radical tax-cutting plans would "tip millions of people into misery". Less than two years later, tax cuts are front and centre of the Conservatives’ manifesto. 

Launching the manifesto on Tuesday, Sunak promised a “clear plan” and “bold action”. But what’s the detail? This week, we unpack the Conservatives’ manifesto and explore what its key pledges could mean for the economy. Next week, we’ll turn our attention to Labour and smaller party manifestos, so watch this space. 

It's all about tax.

The Conservatives’ key message is that Labour will put taxes up and the Conservatives will cut them. (We won’t go into that debate now, but do read our election focus on tax from earlier this week). Sunak’s central gamble is £17 billion of tax cuts. This includes: yet another 2p cut to employee National Insurance Contributions (NICs), aiming to halve the main NICs rate to 6% by 2027 (IPPR have a good explanation of who benefits), the well-documented “Triple Lock Plus” (i.e ensuring that the State Pension doesn’t get dragged into the income tax bracket) and a plan to gradually abolish NICs for the self-employed.

As we explained earlier in the week, this focus on tax cuts is very much at odds with the emerging consensus that taxes will have to rise in the next parliament. 

Other key announcements.

Housing. While tax cuts are the cornerstone of the manifesto, another key focus is housing, and particularly home ownership. It includes a new version of the Help to Buy scheme in which first-time buyers could get a government loan worth up to 20% to buy a new-build property, and makes permanent the increase in the stamp duty threshold to £425k. Both of these pledges continue the path of recent Conservative housing policy, which critics say simply boosts demand and pushes up prices. On housing supply, the manifesto also includes a pledge to build 1.6 million homes over the course of the parliament – clearly a bid to ‘one-up’ Labour’s 1.5 million pledge. It is notable that all the places mentioned in the manifesto as sites for new homes are currently safe Labour seats.

For renters, the manifesto promises to bring back the Renters Reform Bill, which was controversially abandoned a few months ago, and pledges to cut capital gains tax for landlords who sell homes to their tenants. 

As the right of British politics continues to pit the twin struggles of decarbonisation and tackling the cost of living against each other, Rishi Sunak used his manifesto launch speech to reassure voters that the Conservatives will move towards net zero without “unaffordable eco-zealotry”. But what does that mean? One part of it is changing the remit of the Climate Change Committee (CCC), which has already warned that the UK is on track to miss its targets, to give it "an explicit mandate to consider cost to households and UK energy security in its future climate advice". However, climate specialists have said that the CCC already considers such impacts. Climate experts have generally not received the manifesto warmly. Greenpeace UK's policy director, Doug Parr, said it reads “like a car crash for the planet”, while E3G’s Ed Matthew said that the document’s lack of climate ambition “will keep households hooked on high-cost oil and gas.”

Other key pledges include a legal cap on migration, an increase in defence spending to 2.5% of GDP by the end of the parliament, an end to “low quality” degrees and the already divisive national service for 18-year-olds.

Paying for it.

The Prime Minister has promised to tackle the “unsustainable rise in working-age welfare” – a pledge he hopes will go a long way towards paying for his proposed tax cuts. On top of promises to shrink the civil service and reduce tax avoidance, the Conservatives say their manifesto pledges are funded by a staggering £12 billion worth of cuts to the social security system. Institute for Fiscal Studies Director Paul Johnson said such a cut would be “very tough”, while the Resolution Foundation has argued that recent history shows slashing the welfare budget like this is unachievable. The controversial introduction of Personal Independence Payments (PIP) in the early 2010s, for example, was expected to save £1.4 billion by the end of that parliament. In the end it saved just £100 million. In 2015, the Conservative manifesto also announced £12 billion worth of welfare cuts, but there was a U-turn before any of them were actually delivered. (See more on these examples from the Resolution Foundation here).

One of the reasons that people are sceptical about the pledge to cut social security is that it rests on the assumption that there are many people out of work who could or should be working. In the word’s of the Tuesday’s Guardian editorial, the idea “indulges lazy assumptions about benefits as a ‘lifestyle choice'”. The reality is that many (38%, in fact) of those on working–age benefits are already in employment. It’s therefore hard to see how the get-on-your-bike approach will save the exchequer very much at all. The main reason welfare payments have risen in recent years is the dramatic growth in the number of people on sickness and disability benefits, and this is where most of the savings targeted by the Conservatives are expected to come from. However, as many have argued, this is less a problem with the welfare system and more to do with the state of the NHS and mental health services. Without a plan to fix long waiting lists, the only way to cut these payments would be at the direct expense of some of the most vulnerable people in society.

Who's it for?

When you’re 20 points behind in the polls, you have to choose whether to pitch a manifesto that’s radical enough to keep your base on-side post-defeat, or one that’s credible enough to be taken seriously. Initial reactions to the Conservative manifesto suggest it might have failed to do either. While many see the manifesto as unfunded, risky and unworkable (“cosplaying Liz Truss” in the words of Rachel Reeves), many more on the right are frustrated that it didn’t go even further. Some have pointed out that the NICs cut will be cancelled out by tax threshold freezes, calling the failure to commit to abolishing inheritance tax “low octane”. Meanwhile others, more worried about the Reform vote, were hoping for an announcement on quitting the ECHR.

Will it make a difference?

The problem with the manifesto’s biggest giveaway – the 2p cut to NICs – is that they’ve already done it. Twice. Neither occasion seemed to do much to shift public opinion in the Conservatives’ favour. Polling conducted by the Stop the Squeeze campaign found that only 8% of voters said the NICs cut at the beginning of this year made any difference to their finances. It’s unclear why people would respond more favourably this time – perhaps it will be third time lucky.

Weekly Updates

Election round-up

What’s behind slow growth? As figures this week show the UK economy flatlining in April, new analysis from LSE’s Centre for Economic Performance explores the role that “sluggish” productivity has played, and calls for more investment across the public and private sectors.

Greens publish manifesto. The Green Party launched its manifesto on Wednesday, with highlights including a £50 billion health and social care package, a £40 uplift to Universal Credit and a new wealth tax of 1% on all assets worth more than £10m, increasing to 2% on all assets above £1bn. We’ll cover this more next week.

Tiered reserves. The Financial Times explores the emerging election debate around a possible move to a tiered reserve monetary policy framework, and why everyone from the New Economics Foundation to the Reform Party is talking about it.  

The politics of investment. Nick O’Donovan of Keele University explains how the next government can break out of the low-growth, low-investment doom loop, but notes that this involves careful trade-offs “to determine whose consumption must fall, by how much and for how long, in order to free up capacity for investment”.

The outlook for the UK’s public finances. A new briefing from the Centre for Progressive Policy argues that neither main party has a credible plan to tackle rising spending pressures, and explores ways to raise tax revenue and rethink fiscal rules.