UK General Election: Why Labour and Tory manifestos are a missed opportunity

Hello. My name is Andrew Goodwin, and I’m Chief UK Economist at Oxford Economics. UK fiscal policy has become highly dysfunctional. The current setup imposes scant debt discipline and it offers little support for economic growth. General election on July the 4th provides the opportunity for a reset. But the manifestos published recently by the Conservative and Labour parties offer little reason to expect much improvement on either front over the next five years.

Coming into the election, the UK’s public finances are at a very weak position. We expect UK nominal GDP growth to be lower than the effective interest rate that the government will pay on its debt over the next five years. Of the advanced economies, only Italy has similarly poor debt dynamics. But neither party is proposing comprehensive reform. Crucially, both have vowed to keep the current deeply flawed net debt rule, which will limit their room for manoeuvre.

Both parties are also studiously ignoring their poor inheritance from the current government. But by implication, they will have to implement the 3% of GDP worth of fiscal tightening that’s baked into the current plans.

Those past fiscal choices will have a much larger impact on the economic and fiscal outlook than the new tax and spending pledges in the Labour and Conservative manifestos.

We’ve run simulations using our Global Economic Model, and these show that the two parties manifesto pledges will have a negligible impact on GDP growth and on asset prices. The one silver lining is that we doubt either party would stick to its manifesto plans. I think that’s particularly the case if Labour 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 it could result in slightly stronger GDP growth. But even this would represent a missed opportunity for a bigger overhaul of the fiscal framework.