Insight Investment

Polling data suggests the Labour party is in a strong position to win the UK election on 4 July. It is possible that the polls will change once campaigning starts, but at this stage it appears prudent to anticipate a shift in UK policy in the months ahead. We examine this potential shift along with the challenges that would face whichever party wins.

• Labour’s economic policy appears to prioritise low-cost supply-side reforms in an attempt to promote private-sector investment and boost longer-term growth prospects. The strategy is based on a five-point plan for growth and the creation of a range of new institutions.

• Labour’s goal is “the highest sustained growth in the G7”. This is a noble long-term target, but is likely to prove difficult to achieve.

• To reassure markets, the party has committed to two fiscal rules under a strengthened fiscal framework:

– A deficit rule, closing any day-to-day spending deficit over five years; and

– A debt rule, ensuring that debt/GDP is declining in the fifth year of the forecast period.

• The emphasis on fiscal prudence is born from necessity – net debt is high, and the fiscal deficit is only expected to decline slowly. Although current forecasts would see both fiscal rules met, the margin for error is extremely thin, especially for the second rule.
• With meaningful tax rises difficult given the party’s pre-election commitments, spending restraint will be necessary.
• There is a meaningful risk that whichever party wins will end up breaching their fiscal rules unless there is an upward surprise to growth. A Labour win would likely see higher government borrowing for investment, as this would boost long-term growth without breaching the party’s fiscal rules.