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Now that his conservative party has won the UK election in a landslide victory, triumphant prime minister Boris Johnson can turn his attention and energy to the economy. And the next five years will be marked by the opposing effects of his party’s policies, which on the upside should boost growth due to major spending promises, and Brexit, which on the downside will hit the economy whatever the trade deal concluded with the European Union.
Where the pound GBPUSD, -0.5399% settles will be the result of these two conflicting factors.
The British Conservative party’s manifesto may not have played much of a role in the electoral campaign that just ended – compared to the Brexit debate, and the rare unpopularity of opposition leader Jeremy Corbyn. But the UK economy in the next five years will be marked by the promises made even before Johnson decided to hold the general election, and by his need to reassure the millions of Labour sympathisers, who switched to the Tories, that they did not vote in vain.
Johnson has already made clear his intention to deliver on his pledge to raise spending on the UK’s National Health Service – the national, state-financed health care system that the UK, as most other European countries, has known since the end of World War 2.
And travelling on Sunday in Sedgefield, the former constituency of former PM Tony Blair that just voted for the Tories for the first time since 1931, Johnson promised former Labour voters he would “repay their trust” and reiterated his promise to “invest in better infrastructure, better education and fantastic modern technology.
The Conservative manifesto was modest in its spending ambitions, because most of the government’s intentions – with big rises on health or schools – had already been announced in the September “spending review.” The platform however added a boost to public investment in the form of a 15% increase on already-announced spending which, altogether, would take o 2.4% of national income. This would be higher than what has been sustained at any point in the last 40 years, the Institute for Fiscal Studies has noted.
The UK economy has suffered in the last year “partly” from the global slowdown and “importantly” from ongoing Brexit uncertainties, according to the Bank of England. It is forecast to grow slightly more in 2020 (1.4%) than in 2019 (1.3%), according to the European Commission.
But businesses don’t have a clearer idea today on how Brexit will shape up, and “lingering uncertainty could continue to cap investment appetite in the early stages of the new year,” noted ING analysts.
The question is whether the government’s relatively modest fiscal plans will prove enough to make up for the consequences of Brexit, if the government confirms its intentions to strike a deal that takes the UK as far from the EU as possible. That would lower the UK GDP over the next ten years by 2.3 to 7 percentage points, according to the think tank UK In A Changing Europe.
To help sustain growth, the government might be tempted by more spending, and the search for billions would then begin. But it has promised not to raise taxes – although it has cancelled a planned lowering of the corporate tax rate, currently set at 19%.
The UK’s budget deficit is currently forecast at 2.4% of GDP next year, while gross public debt would reach 84% of GDP. A hard Brexit might raise the deficit to nearly 4% of GDP, according to some analysts. The natural way of adjusting for higher debt would be through a slide of the pound.
