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United Kingdom Politics June 2024

United Kingdom: UK elections likely to bring only mild policy shift

On 4 July, the UK will elect a new lower House of Parliament. Polls currently put the center-left Labour Party around 20 percentage points ahead of the center-right Conservatives. This should translate into a large majority of seats in Parliament, which according to some projections could be over 200. However, estimating the size of Labour’s future parliamentary majority is difficult as the country’s first-past-the-post voting system means that vote share is often detached from seat numbers.

Labour has pledged to raise GBP 8 billion in new government revenue by applying VAT on private school fees and changing the tax status of some wealthy residents, among other measures. This, together with some extra borrowing, will help fund increased spending on health, education and green energy. The party has also promised to boost homebuilding, and to improve policy stability through measures such as announcing one rather than two budgets per year and presenting a business taxation roadmap for the entire parliament. On Europe, a Labour government would likely seek a closer relationship with the EU on a sector-by-sector basis, but has pledged not to attempt to rejoin the EU’s single market or customs union.

In the unlikely event that Labour won the most seats but fell short of a majority, it could attempt a deal with the Liberal Democrats or the Scottish Nationalists. These parties would likely push Labour towards a closer relationship with the EU, which could be growth-positive.

If—as is even more unlikely—the Conservative Party emerged victorious, cuts to taxes and public spending would likely ensue, with limited changes to the current UK-EU relationship.

A Labour victory could spur slightly faster GDP growth than a Conservative government, given Labour’s focus on improving policy predictability and homebuilding, proposed slight increases to public spending, and somewhat closer relations with the EU. However, elevated public debt and a large fiscal deficit will limit the room for a more sizable boost to public spending—at least without hikes to key taxes, something Labour has for now ruled out. In addition, the party’s pledge to remain outside the EU’s single market and customs union implies that trade frictions with the bloc will persist, hampering exports and private investment. Our Consensus is currently for 1.5% average GDP growth in 2025–2028, below the 2.0% average in the decade prior to the Covid-19 pandemic.

On the country’s growth potential, EIU analysts said:

“Structural limitations—such as a low investment rate and poor productivity, significant skills gaps, high regional inequalities, and trade barriers created by Brexit—weaken the UK’s medium-term growth potential. However, there are some upside risks for growth in the medium term, especially if stringent planning regulations are reformed under a Labour government, which could boost construction, or if greater liberalisation of trade with the EU boosts the external sector.”

Goldman Sachs analysts commented on the relative policies of Labour and the Conservatives:

“Our estimates imply that Labour’s plans – with higher spending and taxation – would lead to slightly stronger demand in the coming years. We estimate that the Conservatives’ proposals would lower demand by 0.1% relative to current plans by FY2028. Our model implies that Labour’s proposals would instead boost demand growth by 0.15-0.20% by FY2028 relative to current policy, with the timing of the impact depending on how quickly the party’s policy proposals are implemented. That said, our model implies that fiscal policy would remain a drag on growth even under Labour’s policies given the ongoing fiscal consolidation.”

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