A striking choice faces the electorate next week with The Economist magazine describing the Conservatives offering as ‘deliberately dull‘ while The Guardian hails Labour’s manifesto as ‘the most radical manifesto for decades‘. Meanwhile the independent Institute for Fiscal Studies finds both sets of policy proposals lacking in credibility.
Although the main focus is unavoidably on the contrast between the two main parties, it would be a mistake to ignore the SNP, Liberal Democrats and even the DUP (Democratic Ulster Party). A continuation of a deadlocked parliament with no party having an overall parliamentary majority after December 12th remains a distinct possibility and so key elements from the SNP and perhaps Liberal Democrat manifesto could form part of any Labour minority government program with the most controversial elements from their own manifesto being shelved.
Our independent economic consultant, Peter Stanyer has provided a summary of some of the key economic policy, tax and spend items from the major party manifestos (with the number of MPs in the 2017 election in brackets)
‘Get Brexit done’
‘Getting Brexit done‘ will not remove relations with the EU from the front pages of UK politics. Legal withdrawal from the EU in early 2020 would leave a new Tory government committed to reaching agreement on future trade terms with the EU by the end of 2020. Formal agreement is widely seen as unrealistic, though detailed agreement of the direction of travel may be possible. The issue is that collaboration is needed on a wide range of issues (for example the data exchanges needed for security services) for which detailed legislation rather than goodwill is likely to be needed.
The Tories’ intention is to move on to broader social concerns including the NHS, education and the police as soon as possible. Their manifesto includes virtually nothing that would detract voters away from the message that (unlike the Labour party and the Liberal democrats) they would ‘get Brexit done‘.
Triple tax lock
Remorseless demographic trends and pressures from a decade of expenditure restraint make a marked increase in public expenditure and an increase in the government deficit almost inevitable. However, the Conservatives are constrained by having committed to a ‘triple tax lock‘ not to increase rates of income tax, VAT or National Insurance contributions during the next Parliament. To provide some breathing space within this tax promise, they have cancelled their planned 2% reduction in the rate of corporation tax but not surprisingly, independent commentators do not like the restrictions imposed by the tax promises, with the IFS calling the tax triple lock ‘not good policy making‘.
National Living Wage
An important aspect of the Tory policy after leaving the EU and with it a move away from easy access to cheap foreign labour, is their proposal to raise and extend the National Living Wage to younger employees and to raise it to two thirds of average wages by 2024. The Labour party by contrast intend to raise it to £10 per hour for all employees over the age of 16 from 2020, heralding a major increase in the number of employees whose pay would be set by the government.
Those on low wages would enjoy a rise in incomes but probably at the cost of an increase in unemployment (although so far minimum wage laws have had a much smaller impact than expected.) Economists increasingly believe that an abundant supply of staff at low wages from the EU and also from within the UK, as pension age has been postponed, has undermined the incentive to invest in technology and machinery. (In some industries, the arithmetic is unambiguous, if labour can be provided at costs below a particular threshold, automation doesn’t happen). The result has been full employment, surprisingly little pressure for wages to rise and very weak productivity growth.
‘Time for real change’
According to the centre left leaning Resolution Foundation, ‘Labour’s 2019 Manifesto is simply huge in the changes it proposes.’ Labour’s programme would provide for a rapid increase in the scale of both public expenditure and taxation, but also borrowing and the involvement of the state and trade unions in the detailed workings of the economy and of business.
Tax and spend
Labour proposes increases in income tax which would extend to include capital gains tax; an ‘Excessive Pay Levy‘ to be charged to employers of high earners; a wide ranging review of corporate tax reliefs and calls for 10% of the ownership of large UK businesses to be transferred to an ‘Inclusive Ownership Fund‘ over a period of 10 years. Some of this would be for the benefit of employees and the rest for the state.
A promised 5% increase in public sector wages immediately after the election comes alongside plans to cut rail fares by 33%; to provide ‘full-fibre broad band for all‘ and no further increases in the state pension age beyond 66. A further proposal to compensate the ‘WASPI‘ women for the increase in their state pension has followed the manifesto at a further cost of £58bn. Labour is also proposing renationalisation of Royal Mail, water and energy utilities and the railways.
Ambitious building plans
Significant plans for council house building are also proposed. However, initially the scale of the building programme would only be feasible by diverting resources from private sector housing projects, which have expanded rapidly in recent years. Longer term, expanded apprenticeships or a return to free movement of labour within the EU could increase the availability of skilled labour to help meet these ambitious plans.
However, the UK is currently operating close to full employment and any major increase in government spending would increase inflation, divert existing activity and weaken sterling and the balance of payments.
The Labour manifesto has so many proposals and changes in policy that it is almost inevitable that unintended consequences could undermine their plans and weaken tax revenues. There would be inevitable shortfalls in implementing policies. Trying to achieve sharp increases in tax revenue from relatively few very high tax payers encourages them to move offshore or cut their earnings. Threats to ownership structures will lead some firms to relocate and that has already begun.
Despite a surprising number of economists having signed a letter in support of the Labour party to the Financial Times, the Labour programme does not add up to a coherent approach to improve the functioning of the UK economy. An historic opportunity to focus the undoubted income potential of the UK to address Britain’s social and economic needs may have been missed.
‘Stronger for Scotland’
If there is a hung-parliament with the Labour Party able to form a majority with the SNP, then a second Scottish independence referendum should be expected during the lifetime of the next Parliament and strong efforts to reverse the Brexit referendum could be expected. In addition, the SNP would support Labour in scrapping Trident nuclear submarines. Apart from this, there are few explicit economic or financial redlines for the SNP, though it is likely that the SNP would temper the more extreme tax and spend and governance policy proposals of Labour’s manifesto.
‘Stop Brexit – build a brighter future’
The Lib Dem’s 100 page programme includes many far reaching proposals for changes in taxation and government expenditure which could help improve the efficiency of the economy while addressing income and wealth inequality and also keeping the national debt under control. Like Labour, the Lib Dems propose that capital gains tax would be abolished and taxable gains would be subject to income tax rates. Tax revenue would be supported by raising all income tax rates by a penny in the pound and corporation tax, currently 19% would be raised to 20%. Business rates would be replaced with a tax on the value of commercial land (which in principle is something many economists would like, but as ever the devil would be in the detail). There would be a major focus on investing in infrastructure to support climate change, and stamp duty would vary depending upon a property’s energy rating.
‘Let’s get the UK moving AGAIN’
The DUP would only want to deal with the Conservatives and they would call for Boris Johnson’s agreement with the EU to be tempered to ensure that it ‘does not leave Northern Ireland behind‘. They explicitly would not want a border in the Irish Sea.
With just over a week to go, if the Conservatives falter, then more likely than a Labour majority is a working arrangement between Labour and the SNP, and possibly the Lib Dems. If so, the immediate threat to UK business, the UK economy and private wealth will not necessarily have gone away, it may merely be postponed to fight another day.
(Peter Stanyer is co-author with Professor Stephen Satchell of The Economist Guide to Investment Strategy, 4th edition, Profile Books, 2018. The views expressed are his own personal views, and do not constitute advice to buy, sell or hold any investment.)
Please be reassured that regardless of the outcome of the election or ongoing Brexit negotiations, we stand ready to help you navigate the inevitable changes and challenges that we will face over the coming years so do, as always, call on us for support and guidance.