Economic Implications of the U.K.'s Recent Election

Executive Summary

Despite opinion polls suggesting a close call, Prime Minister David Cameron and his Conservative Party easily secured victory in the U.K. general election on May 7. In our view, the election outcome does not imply major changes to the British economic outlook, at least not in the near term. The Conservative Party has governed the country for the past five years, albeit in a coalition government with the Liberal Democrats, and there likely will not be a wholesale change in economic policy now that the Tories are running the government without their erstwhile coalition partners. The outlook for Bank of England monetary policy is little changed as well.

The biggest uncertainty is the planned referendum on continued U.K. membership in the European Union that Prime Minister Cameron has promised to hold before the end of 2017. If voters choose to leave the European Union, the United Kingdom could lose some of the economic benefits that EU membership confers. Near-term political uncertainty in the United Kingdom has been resolved by the outcome of the May 7 election. The long-run relationship of the United Kingdom with the European Union, and the economic implications of that relationship, has become more uncertain, however.

Conservative Party Scores a Surprising Victory

Prime Minister David Cameron and his Conservative Party won a surprising victory in the U.K. general election that was held on May 7. Most opinion polls conducted before the actual balloting occurred had suggested that the election was too close to call and that no single party would win an absolute majority in the 650-seat House of Commons. The Conservative Party garnered more than 36 percent of the vote, easily outdistancing the 29 percent that the Labour Party received. Moreover, the Tories won 331 seats, allowing them to govern without the Liberal Democrats, who had served in a coalition government with the Conservative Party over the past five years.

The British pound and the FTSE stock index jumped in value in the immediate aftermath of the election results. Whether the rally in the price of British assets reflects the market’s approval of the governing philosophy of the Conservative Party or the diminution of political uncertainty is impossible to say. In our view, however, the election outcome likely will have few implications for the near-term British economic outlook.

Few Changes Expected in Near-term Economic Policies

For starters, the Conservative Party has been the primary coalition partner over the past five years, and the budget cutting that has been in place over that period largely reflects Tory policy priorities. As shown in Figure 1, the contributions to overall GDP growth from government consumption and investment expenditures are generally much smaller today than they were under the Labour governments of the past decade.

Moreover, Chancellor of the Exchequer Osborne, who has retained his position in the recently announced cabinet, proposed further deficit reduction over the next five years when he made his budget outline in March. As shown in Figure 2, Osborne proposes that the government achieve budget balance, on a cyclically adjusted basis, in fiscal year 2018-2019.