Labour have not left enough cash for cost pressures

I’ve been sent a spreadsheet that was put together by a senior former Treasury official in consultation with some other senior former Treasury officials. It shows that Labour have not left enough money in their fiscal plan to cover inflation.

Inflation pushes up wages and the costs of goods and services. This benefits the Government’s accounts on the tax revenue side (the more you earn the more tax the Government collects) but it also increases their costs.

Now Budget documents such as the PREFU take account of inflation for tax revenue but they do not allocate inflation costs for expenditure. Instead you have the “operating allowance” which is to cover those inflationary costs, as well as new policies.

Labour have allocated almost all of the operating allowance to their new policies and have covered inflationary costs in health and education. But they have not got enough money to cover inflationary costs in the rest of Government.

So to be clear it is not a hole in the sense that Labour has made a mathematical error. But Labour have left basically no money in their budget for inflation (or population growth), yet their tax revenue is based on them. Quite simply they will not be able to keep within their fiscal plan unless you believe they will massively slash spending in some undefined areas (or not give any public servants outside Health and Education a payrise for three years).

This is a summary prepared by the former senior Treasury official. It is not a hole, but it is a shortfall. They have no capacity to fund any impact of wage and cost inflation and this is just over $10 billion.

They have left themselves $7.5 billion (cumulative) for new policies for the next three years. Even if they didn’t announce a single new policy in their entire term of Government, they’s still have a shortfall because of cost pressures on existing programmes.

For those who are good with numbers, I’ve attached the spreadsheet below that I was sent. It is detailed and comprehensive. Again the spreadsheet was put together by a senior former Treasury official in consultation with a group of other senior former Treasury officials.

Excel – Labour’s budget – the cost escalation problem

So for Labour’s fiscal plan to be credible you have to believe that they will either announce no new policies in their first term of Government (if elected) or that there will be no pay rises for any public servants (outside health and education) and that there will be no increase in the costs of good and services the Government purchases.

I look forward to Labour explaining to the unions how it is not going to have any wage rises in the public sector (outside Health and Education) for three years!