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FactCheck: unfunded Tory promises?

By Channel 4 News

Updated on 20 August 2008

Can the Conservatives pay for their policy pledges made to date?

The claim

"By my tally, the Tories have commitments of an extra £11bn of unfunded promises, while saying borrowing is too high."
Yvette Cooper, Chief Secretary to the Treasury, The Guardian, 18 August 2008

The background

With the election a likely 18 months-plus away, the Conservatives have shied away from unveiling many concrete policies - perhaps not unfairly, given there's little to stop Labour stealing their thunder and snaffling any juicy ideas on to the statute books.

But this means an opposition party can promise the electorate all sorts of tempting carrots, without having to find the cash for them or face the consequences in the national accounts in the same way the government does.

Policy-lite, economically incompetent - that's how Labour likes to portray the Conservatives. This week treasury number two Yvette Cooper claimed the party had made £11bn-worth of unfunded promises.

Is she right?

The analysis

Labour said the £11bn breaks down to five main Conservative commitments.

Three of these were unveiled at last year's party conference: an increase in the inheritance tax threshold to £1m (at a cost of £2bn), cutting stamp-duty for first time buyers (cost: £0.4bn), and working tax credit increases (cost: £3bn).

FactCheck examined these in detail last year. The inheritance tax and stamp-duty changes would be funded by a flat tax of £25,000 a year on non-doms - super-wealthy non-Brits who, a year ago, didn't pay any income tax.

There's a big grey area around exactly how much such a tax would raise - the nature of non-doms means it's not possible to say exactly how many of them there are, or how they would behave if their tax status were changed.

In last October's pre-budget report, the chancellor changed the inheritance tax threshold and introduced a £30,000 year levy on non-doms who'd been living in the country for more than seven years - prompting widespread accusations that he'd nicked the Tories' policy.

The Treasury claimed taxing non-doms would bring in a much smaller amount of money than the Conservatives predicted - and it's still too early to plump for one side or the other being right or wrong.

So that's two down - not necessarily funded or unfunded; we just can't say.

Easier said than done, points out Labour, which has been trying to reduce the number of benefit for a long time.

The other conference commitment - to abolish the so-called "couple penalty" by making the cash breaks given to single parents and couples more equal - would, the Tories say, be paid for by getting around 600,000 people off benefit.

Easier said than done, points out Labour, which has been trying to reduce the number of benefit for a long time. However, the Conservatives say the tax credits will only be rolled out once the welfare reforms bring in the necessary cash, so technically they're not unfunded.

This is true, in balance sheet terms, but it does leave the Conservatives open to the criticism of waving juicy carrots to voters that may never materialise.

It's an issue that crops up with proposal number four on Labour's charge sheet - the "promise" of a transferable marriage tax allowance (cost: £3.2bn). Tory leader David Cameron has long expressed his desire to recognise marriage in the tax system. In July 2007, he welcomed a report from the social justice policy group (led by his predecessor Iain Duncan Smith) which proposed tax breaks for married couples.

The £3.2bn figure Labour quotes comes from the most expensive of the group's recommendations, which would allow all married couples to share their tax allowance.

The Conservatives haven't yet committed to adopting this, however, or any of the cheaper options proposed, such as applying the allowance only to couples with children under the age of five.

Cameron has promised to help out married couples through the tax system, but until he sets out in more detail what this will involve, it's hard to make the accusations of unfunding stick. Labour still has a point - we just can't do the necessary analysis yet.

Labour's last - and most recent - Tory commitment is a 5p cut in fuel duty, at a cost of £2.75bn.

Technically, the party hasn't committed to a 5p cut in fuel duty, but last month it did propose a "fair fuel stabiliser", to offset the fluctuating cost of petrol by cutting fuel tax when the oil price rises, and increasing fuel tax when the oil price falls.

If this had been introduced at the 2008 budget, a litre of fuel would be 5p cheaper, the party pointed out at its launch - the number that's likely to have stuck in people's heads as a promise.

But how to pay for it? The chancellor recently postponed a planned 2p increase in fuel duty, but treasury revenues were expected to take a £550m hit as a consequence.

However, the Tories reckon their measure will pay for itself. When the oil price rises, the treasury gets a tax windfall, mostly in the form of extra corporation tax from North Sea oil companies. When the oil price falls, tax revenues take a hit.

If this had been introduced at the 2008 budget, a litre of fuel would be 5p cheaper, the Conservative party pointed out at its launch.

So the party claims it could balance out the public finances with an inverse increase or decrease in fuel duty - while keeping the price of petrol more stable (though not constant) at the same time.

But the impact of the oil price on the public finances isn't quite that simple. Things shift around between oil producers and oil consumers, so although corporation tax from oil companies increases when the oil price rises, other taxes drop - the corporation taxes paid for by non-oil producing businesses, for example.

The Tories are basing their estimate on a cautious reading of work done by the National Institute for Economic and Social Research in 2005. NIESR found that, overall, a $10 increase to the price of a barrel oil led to a tax increase of around £1.4bn (at this year's prices).

The tax situation for oil companies has changed since then (in the Tories' favour), but do NIESR's findings give the Tories the green light?

"It's hard to say that a fuel stabilisation policy is fiscally neutral in the longer term," says Simon Kirby, a senior research officer at NIESR.

The research covered the institute's expectations for the next five years, but Kirby cautioned that it wasn't a long-term prediction.

"A number of factors can affect the oil price and tax revenue relationship, for example changes in the exchange rate - as oil is priced in dollars - and changes in oil output," said Kirby.

If - as is expected - oil stocks run down, the picture could well be different.

So what does all this mean for the financing of the Tories' spending plans?

The best available data in this country - the NIESR work - suggests tax revenues do increase when the oil price rises, at least in the short-term.

But there's still an element of uncertainty about the whole, complex picture, particularly in the longer term - Kirby describes the research as a helpful ready reckoner, but says he does not think it gives the "definitive answer" of what would happen.

The Tories' plans aren't yet definitive, either - the party is consulting on the level at which to set the stabiliser, and how often to review it.

The verdict

The Tories have made noises about five different policies with uncertain funding.

While Cooper makes a fair point in drawing attention to the cost of these, describing them as unfunded promises is not clear-cut.

It's unclear how much money the Tories' changes to fuel and non-dom taxes would bring in, and the changes to tax credits and the tax allowance for married couples aren't yet commitments with a firm start date.

It's questionable how much the party should be talking about policies it hasn't yet promised to implement - but that's something to watch closely as the election draws nearer.

FactCheck rating: 2.5

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Every time a FactCheck article is published we'll give it a rating from zero to five.

The lower end of the scale indicates that the claim in question largerly checks out, while the upper end of the scale suggests misrepresentation, exaggeration, a massaging of statistics and/or language.

In the unlikely event that we award a 5 out of 5, our factcheckers have concluded that the claim under examination has absolutely no basis in fact.

The sources

Conservative Party
Labour Party
Institute for Fiscal Studies
National Institute for Economic and Social Research

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