UK: Why Labour and Tory manifestos are a missed opportunity

The pledges announced in the Conservative and Labour parties’ manifestos will have little economic impact according to our modelling, especially considering the impending fiscal consolidation that both studiously ignore.

What you will learn:

• Consolidation is needed – the UK’s public finances are in a very weak position. We expect UK nominal GDP growth to be lower than the effective interest rate the government will pay on debt over the next five years. Of the advanced economies, only Italy has similarly poor debt dynamics. However, the refusal by both Labour and the Conservatives to rethink the UK’s flawed fiscal rules will hinder growth prospects and force more policy tightening than is absolutely necessary.
• The manifestos of both parties imply the plans to tighten fiscal policy by 3% of GDP inherited from the current government will be implemented. New tax and spending pledges are small in scale and fiscally neutral. Indeed, scenarios run on our Global Economic Model find their manifesto pledges will have a negligible impact on GDP growth and asset prices.
• We doubt either party would stick to its manifesto plans, particularly Labour if it wins a large majority. A more likely scenario is that Labour would tweak the debt rule to remove the distortionary effects of losses on the Bank of England’s Asset Purchase Facility. This would allow higher spending and could result in slightly stronger GDP growth.