UK: Magic money please – Standard Chartered

According to Christopher Graham – Economist, Europe at Standard Chartered Bank – the Conservative and Labour parties’ election manifestoes present very different visions of spending and taxation.

Key Quotes:

“While the Conservative party is opting for modest increases in day-to-day spending, this builds on already sizeable commitments to the public sector made in September and will be accompanied by a potentially large increase in capital spending. Labour on the other hand is aiming to increase both day-to-day and investment spending on an unprecedented scale, with overall spending potentially increased by as much as GBP 137bn per year by 2023-24 (5.4% of GDP). The Institute for Fiscal Studies (IFS) has noted that neither of the manifestoes offers a ‘properly credible prospectus’.”

“More accommodative fiscal policy is expected regardless of which party ends up in government. However, other factors are likely to complicate each party’s strategy. The Conservative proposals may be modest compared to Labour’s, but there is a greater prospect of the UK ending up in a sub-optimal trade arrangement with the EU by the end of 2020 under a Conservative administration, which could damage the economy and hence government finances. If a Labour government is returned, there is a greater chance of fiscal slippage given the scale of its spending plans, while Labour’s pledge to hold another referendum on Brexit would lead to more uncertainty that could weigh on UK economic data. However, Labour’s ability to see through its election promises will also be constrained by the likelihood that, if it forms a government, it will probably be in coalition with other parties. Given these dynamics, we see scope for the fiscal deficit to widen by anywhere from 1.0% to 4.0% of GDP over the medium term. For now, risks to UK’s creditworthiness are likely to remain limited, but credit rating agencies will be alert to how fiscal and debt dynamics evolve once the general election is over.”