The Economic Implications of the 2019 UK General Election
[Disclaimer: The opinions expressed in this publication are those of the author and do not necessarily reflect the opinions or views of DUES or its members.]
It’s official – Britain is heading for the polls again for the third time in 5 years. The 2019 general election has the potential to reshape Britain’s future with Europe in terms of long-term trade, political & security relationship, and the future of the union between England, Scotland, Wales & Northern Ireland. The proposed conclusion on Brexit by different parties will be the main determining factor on the outcome of this election. The Conservative party hopes to win the election with a majority in order to pass the Brexit deal in parliament. Meanwhile, Labour hopes to be in government to re-negotiate a new Brexit deal with the EU and take it to vote amongst the public for a final say.
According to a study done by the National Institute of Economic and Social Research (NIESR), a Conservative win and Boris Johnson’s deal being passed would proposedly leave the UK £70 billion worse off by 2029. The Brexit deal proposed by Prime Minister Johnson suggests stability on the outcome of the whole Brexit process. However, there are consequences of eliminating possibilities of a closer trade relationship with Europe. The new deal will create more regulatory barriers, thus hindering existing free trade and potentially shrinking the economy by 3.5% compared to EU membership, as reported by the Bank of England.
Alongside Brexit, political parties are confronted with many pressing economic challenges in this upcoming election, including decreasing home ownership by the youth of this generation, increasing inequality, and increasing tax levels.
Firstly, the rising property prices have meant only 36% of those born in the 1980s have become homeowners by the age of 30, in contrast to 55% for those born between the 1940s – 1970s. This reflects the rise in property prices (about 20% higher than 20 years ago). Therefore, young voters will be keen to hear how different parties look to address the concern of rising housing costs.
Productivity rate is also 19% lower than what it could have been, had the economy followed the trend before the financial crisis. Low productivity has meant stagnations, if not declines, in real wages of roughly £5000 less for the working people. BBC reported that 58% of all those below the poverty line were from working households, an increase from 41% two decades ago. However, the 12-year pay downturn appears to be coming to an end recently. This is positive news in terms of raising living standards for many. However, the challenge for the political parties remains as millions of workers and younger people are still experiencing poor growth in wages.
Labour’s manifesto delivers a strong socialist message, with the big economic statement being the pledge to take borrowings of £400 billion. They seek an increase of a yearly borrowing commitment from £25 billion to £55 billion over the first 5 years to spend on sectors, such as housing, transport, energy and education. Their £150 billion “social transformation fund” should increase aggregate demand through the multiplier effect and generate strong economic growth based on Keynesian fiscal theories. If Labour were to win the general election, this would be the largest investment in the public sector since the 1970s. This is in sharp contrast to the Conservative’s economic policy, which aims to get the deficit down by 4/5.
However, questions continue to surround Labour and its credibility to be trusted with the economy after the 2008 financial crisis. Since 2008, it has failed to be elected as the ruling party on three different general elections. Conservative’s austerity programme, despite many criticisms, has steadied the economy by reducing the deficit. In 2017, Theresa May claimed that “in the last seven years, the deficit has come down by almost ¾ as a share of GDP.”
Conservatives have contended that the pledges made by Corbyn would cost £1 trillion, more than projected by the Labour party. As the claims come from the Tories and not the Treasury, consideration must be taken on the influence of such statement shifting Labour votes in favour towards the Conservatives. The Conservative have similar notions of increasing spending – current Chancellor Sajid Javid is also willing to relax the spending rules and take advantage of the low borrowing cost offered to the government. The Conservative plan is a potential £100 billion investment in hospitals, school and other infrastructures.
However, questions have been raised on how all this proposed increase in spending will be financed. There are concerns over Britain’s credit rating as Moody’s has forecasted a downgrade since cutting debt is not anyone’s top agenda. This may impact votes if policymakers do not have credible strategies to cut debts.
To this end, the Labour party aims to pursue its spending plans with a substantial raising of tax levels. It aims to raise corporate tax levels up to 26% by 2022. It also wants to increase income tax for those earning above £80,000 in an “excessive pay levy,” and an introduction of a new set of “super” income tax rate of 50% on people earning £125,000 and over. This may please individuals on lower-income tiers, but Britain is a capitalist country. Increasing tax levels for individuals on higher income may demotivate individuals to be more ambitious or hard-working. It could potentially lead to brain drains and a loss of financial investments. Brexit and its uncertainty are already causing a fall in investments and any proposed raise of corporate taxes would only undermine the attractiveness of the UK as a financial hub to invest and do business.
On the contrary, the Conservative party hopes to use issues on tax levels as a dividing line between itself and the Labour party. Tories have proposed a “triple tax lock” of no raise in income, corporate and NI tax.
The proposed raising of taxes and high borrowings has seen Mr Corbyn’s rating at a record low. Ultimately, Labour may also come short on Brexit due to Jeremy Corbyn’s stance on staying neutral, which some may view as a lack of authority and indecisiveness.
Image Credits: Wikimedia Commons