As Labour and the Conservatives battle their way to the polls, can either party boost economic growth in the UK?
- The ability for either party to make significant commitments to boost growth is limited
- There are longer-term plans that may make a marginal difference to economic growth
- The one key difference may be confidence.
It’s only been two weeks, and election fatigue is already starting to set in. Both sides have been light on policy announcements, and it seems like the election may make no difference to the UK’s economic outlook at all. Could either party shift the dial on the UK’s anaemic growth outlook?
Part of the problem is that the fiscal wiggle room is extremely limited for both parties. The UK’s structural debt is now £2.7trillion , around 98% of GDP or £37,900 for every person in the UK. The last time it was this high was in the 1960s, when it was still recovering from the Second World War. The annual budget deficit was £51 billion in the 2023/24 tax year, equivalent to 1.9% of GDP. Baring the pandemic, this is the highest level since the 1980s.
That means the ability for either party to make significant commitments to boost growth is limited. Both parties have learned lessons from the Liz Truss experiment of 2022, and neither is keen to spook the bond market again. Both Labour and the Conservatives have committed to the existing primary fiscal target that said government debt must be falling as a percentage of GDP by the fifth year of the forecast.
There are longer-term plans that may make a marginal difference to economic growth. Labour’s action on workers’ rights may help the UK’s dismal workforce participation rates by encouraging people back to work, but this will take time if it happens at all.
Labour has also said it will strive to improve UK-EU relations. The economic benefits of being outside Europe have so far proved elusive. Some harmonisation on UK and EU standards in specific areas may also improve economic growth at the margin. However, Karen Ward, JP Morgan Asset Management, remains cautious: “We doubt any major shift in the relationship will happen quickly and a reversal of Brexit remains very unlikely in our view” .
She adds: “Overall, with both parties acknowledging fiscal constraints, both parties competing in the political centre ground and the well-flagged potential for a change of leadership, there are unlikely to be any significant implications for markets when the vote is counted.”
However, Ward acknowledges that the one key difference may be confidence. “It is possible that household and business confidence increases if a shift to Labour is seen to bring a period of political stability… Such an improvement in consumer confidence could help support the UK’s nascent recovery.”
