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Lib Dems admit to £1.7bn hole in their budget

Ed Davey
Ed Davey is the economic spokesperson for the Liberal Democrats. Photo: Luke MacGregor/Reuters

The Liberal Democrats have admitted to an undercosting of £1.7bn ($2.2bn) in spending figures presented in their manifesto, following calculations from Yahoo Finance UK.

The £1.7bn shortfall is in their day-to-day costs — government spending excluding capital expenditure.

The party miscalculated costs around the policy of reintroducing maintenance grants for university students. It mistakenly included capital spending reductions as a day-to-day saving, thus artificially lowering the cost of the policy.

When questions were raised by Yahoo Finance UK to the party’s economic spokesperson Ed Davey, he said: “I’m afraid I would need to go back to how we costed rigorously. The IFS [Institute for Fiscal Studies] have costed all of our numbers, so what’s good enough for the IFS is good enough for me. With due respect to Yahoo [Finance UK], the IFS are the most prestigious public finance organisation in the country.

“We have costed it really carefully ... [and] the IFS are the experts on this”

However, when details of Yahoo Finance UK’s calculations were presented to a Liberal Democrat spokesperson after the interview with Davey, the party confirmed that there would be an additional £1.7bn cost to the policy in day-to-day spending, partially offset by a reduction in capital spending.

A Liberal Democrat spokesperson said: “Our main fiscal rule is to target a 1% surplus on the structural current budget in five years, with flexibility to be between -1% and +1%.

“Under our plans, the structural current budget would be in surplus every year, even with that £1.7bn added to current spending. Our spending plans forecast a structural current budget surplus of £23bn in 2024-25 (0.9% of GDP).”

The IFS, however, said that there would be a net increase in cost of £600m according to their calculations, and an increase in £2bn in day-to-day spending.

IFS economist Laura van der Erve said: “Under the new accounting treatment, the upfront cost of providing grants rather than loans would be reflected in resource spending. But as it stands the portion of the maintenance loan that the government doesn't expect to get back shows up as capital spending. Replacing loans with grants eliminates this capital spending, and so the higher resource spend is partially offset by lower capital spend.

“This net cost is the economically meaningful number, as it represents the 'true' cost of the policy. However, it is also true that the Liberal Democrats' fiscal rule is couched in terms of the current budget balance, which excludes capital spending.”

Under both IFS and Liberal Democrat calculations of the cost implications – following Yahoo Finance UK’s analysis – the Liberal Democrat manifesto would no longer be cost neutral.

However, given the party’s low estimations of their “Remain bonus” policy, it is probable that an increased financial benefit from remaining in the EU would neutralise the increase in spending.