By Max Shepherd, Group Economist at Accord Mortgages
Labour won a majority in the General Election on the 4th July, as was widely expected. They managed to achieve a 174-seat majority which should enable them to progress their political decisions through parliament with relative ease.
As the result was expected, the results had a minimal impact on the financial markets and they continued to function business as usual.
In the grand scheme of things, at least from a macroeconomic perspective, there is little difference regardless of political affiliation between the former Conservative and the new Labour Government - at least in the near term. The reality is there isn’t a lot of spare money at the moment, so choices are limited.
The previous government had two main fiscal rules, which are restrictions on fiscal policy designed to constrain its own decisions on spending and taxes. Labour has pledged to keep these rules, in order to maintain financial stability. The rules are as follows:
The first rule receives a lot of criticism as it allows a government to raise debt in the first four years of its plan, as long as it is falling in year five. This means that in the early part of their term when a budget is announced, a government can postpone spending cuts to year five of the plan, effectively kicking the can down the road for another day.
These rules will constrain Labour from materially increasing spending or borrowing which are the two main ways a Government could cause an increase in interest rates. Therefore, interest rate expectations are largely unaffected by the change in Government.
There is no doubt Labour will want to increase Government spending, in order to revive our strained public services. The problem being, where does the money come from?
The only way Labour can materially increase spending in the short term is by either changing the fiscal rules (which Rachel Reeves, Chancellor of the Exchequer, has ruled out), or by increasing taxes. In the run up to the election, Labour ruled out increasing the main forms of personal taxation: income tax, national insurance and VAT. She has also ruled out raising corporation tax. These taxes account for three quarters of current tax revenue, so ruling tax hikes out in these areas limits the scope for major increases in tax revenue, unless there is a significant change to the current tax system (which is unlikely).
Therefore, we will have to wait for economic growth to return before we can experience materially higher government spending. Growth is at the heart of the Labour plans, so if this unlocked, it would naturally lead to more government revenue without increasing the rate of taxes. It is worth saying all governments aspire to have high economic growth, it doesn’t necessarily mean they will achieve it.
We will find out more about Labour’s plans on taxation and spending following the Autumn statement which will likely take place in October / November this year.
Below are the key policies the Labour government set out to achieve in their manifesto:
There are certainly policies in there which focus on first-time buyers (FTBs), but nothing radical. The planning reforms have been proposed to try and increase the supply of housing which has long been an issue for FTBs, as housing is in short supply and often unaffordable for potential buyers looking to get on the housing ladder.
Despite the target being a significant improvement on the status quo in terms of house building, it is unlikely to negatively impact house prices due to the current mismatch between demand and supply. And cynically, all recent governments have attempted to increase the supply of housing and fallen short of their initial targets. Maybe the planning reforms will be the difference this time – time will tell.
For more information on the current economic environment, please watch our latest Growth Series event available here.by Jeremy Duncombe
Added 14/03/24 - min read
by Jeremy Duncombe
Added 14/12/23 - min read
by Jeremy Duncombe
Added 30/11/23 - min read
Added 29/11/24 - 1 min read
Added 28/11/24 - 1 min read
Added 25/11/24 - 3 min read
Get in touch with our Editorial Team here
Information on this site is for use by authorised intermediaries only and should not be relied upon by anyone else.
Accord Mortgages Limited is authorised and regulated by the Financial Conduct Authority. Accord Mortgages Limited is entered in the Financial Services Register under registration number 305936. Buy to Let mortgages for business purposes are not regulated by the Financial Conduct Authority. Accord Mortgages Limited is registered in England No: 2139881. Registered Office: Yorkshire House, Yorkshire Drive, Bradford BD5 8LJ. Accord Mortgages is a registered Trade Mark of Accord Mortgages Limited.
References to 'YBS Group' or 'Yorkshire Group' refer to Yorkshire Building Society, the trading names under which it operates (Chelsea Building Society, the Chelsea, Norwich & Peterborough Building Society, N&P and Egg) and its subsidiary companies.
All communications with us may be monitored/recorded to improve the quality of our service and for your protection and security. Calls to 0800 numbers are free of charge from a landline or mobile. Calls to 03 numbers are charged at the same standard network rate as 01 or 02 landline numbers, even when calling from a mobile.
YBS Group Slavery and Human Trafficking statement | Privacy Policy | Cookie Policy