Forecasting Eye 

 

The Lib Dems and Labour have produced their manifesto launches in the last week. The Tories seem to be delaying theirs until late in the campaign, presumably in response to the difficulties that followed the release of their manifesto in the 2017 election.

 

The background to the parties’ promises is that the UK public deficit is no longer falling. Total borrowing for the financial year to date stood at £46.3 billion by end October, £4.3 billion more than in the same period last year. Although the UK’s debt-to-GDP ratio has fallen slightly to 80.4% in the past year, our estimates suggest that on a seasonally adjusted monthly basis the ratio is starting to rise again.

 

Added to this mix is Modern Monetary Theory (MMT). This essentially is a rehash of traditional Keynesianism saying that the government can run deficits when resources are underutilised, though emphasising the ability to print money rather than the Keynesian emphasis on the issuing of bonds. This resonates at present when Chinese savings, though falling, are high and when banks’ willingness to lend is constrained by the damage to their balance sheets resulting from the financial crisis and the more severe capital adequacy requirements that also date back to the crisis. A consequence of this are the current rock bottom rates of interest.

 

Cebr’s take on MMT is that there is certainly increased short term scope for borrowing. But this has to be constrained by two factors. The first is that borrowing will likely need to be repaid or rolled over at some future point when interest rates may be much higher. The second is that any fiscal stance needs to maintain market confidence. This implies two tests to determine the extent to which borrowing can be higher: 1) To what extent is the borrowing funding genuine investments that will lead to higher GDP and tax receipts in the future? 2) Is the overall policy stance of the government such as would be likely to maintain market confidence?

 

The Lib Dems manifesto ‘Stop Brexit Build a Brighter Future’ takes credit for a £50 billion ‘Remain Bonus’ claiming the economy will be 2% bigger by 2025 if the UK remains in the EU. They propose to spend £130 billion more on infrastructure over five years, raise most direct tax rates by 1 percentage point increasing revenue by about £9 billion a year; increase spending on schools, skills, health, R&D, the environment, welfare and renewable energy. At the same time they are promising a falling debt-to-GDP ratio and ‘making sure that day-to-day spending does not exceed the amount of money raised in taxes’. The manifesto has not been audited independently.

 

The likewise ‘self-audited’ Labour manifesto, ‘Funding Real Change’, purports to show additional expenditure running at £82.9 billion per annum by 2023/24 matched by additional revenues running at the same amount. The revenues are to come from higher taxes on the rich and on companies, though even their maths must have tired near the end because there is a final £5 billion of additional revenue attributable to ‘multiplier effects’. It is assumed that the various nationalisation plans are cost free and GDP is not significantly reduced by the higher rates of corporate and personal tax. Some manifesto policies are not costed.

 

The Tories have not yet produced a manifesto, though there has been a range of announcements, including a higher starting rate for national insurance; reversing the last cut in corporation tax from 19% to 17% and pledges for increased spending.  They have also promised the current budget will be in balance by 2022/23.

 

All the parties will have difficulty in marrying fiscal responsibility with their spending plans. The Lib Dem’s ‘Remain Bonus’ assumes international investors will flock back to the UK on a scale sufficient to boost GDP by 2% simply on the cancelling of Brexit, which seems unlikely. Labour’s assumption that they can raise £83 billion in higher taxes with only small negative ‘behavioural effects’ seems even more improbable. And the Tories will have to stage many of their commitments to be consistent with their new fiscal rules, which are currently still in the making.

 

But while the Lib Dems and the Tories might be accused of overoptimism, their plans look as though they might be managed at least short term with some shoehorning. The Labour plans, on the other hand, would not inspire market confidence. If elected, it is likely that there could be capital flight and a falling pound.

 

Contact: Douglas McWilliams dmcwilliams@cebr.com 0207 324 2860