Economics 101: UK General Election – Much Ado About Nothing?

By Max Shepherd, Group Economist at Accord Mortgages

Overview

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.

Economic impacts

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:

• Debt should be on course to fall as a share of national income in five years’ time.
• Public sector borrowing should not exceed 3% of GDP in five years' time.

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.

What does it mean for the housing market?

Below are the key policies the Labour government set out to achieve in their manifesto:

•  Deliver 1.5m homes over the next 5 years while undertaking extensive planning reform to unlock infrastructure investment and housing construction.
• Introduce mandatory local housing targets and bring forward the next generation of New Towns.
• Devolution to mayors, with stronger powers over planning and control over housing investment.
• ‘Planning Passport’ for urban brownfield development, with a fast-track approval and delivery of high-density housing on urban brownfield sites.
• A Freedom to Buy Scheme to help people secure a mortgage.
• Tax foreign buyers to fund planning officers.
• First dibs for local people on new developments, ending the farce of entire developments sold off to international investors before local people get a look in.

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.