Paul Diggle
Hello and welcome to Macro Bytes the economics and politics podcast from abrdn. My name is Paul Diggle
Luke Bartholomew
And I'm Luke Bartholomew.
Paul Diggle
And today we are talking about the UK election. There will be a general election in the UK on the 4th of July, we're going to talk about the economic reasoning that went into calling that snap election, the possible result, and most importantly, the potential economic and investor implications of, if the polls are correct, a Labour government. So, we're joined by Lizzie Galbraith, political economist at abrdn, welcome, Lizzy.
Lizzy Galbraith
Thanks for having me back on.
Paul Diggle So why don't we start by talking about the timing of the announcement because it was a surprise that Rishi Sunak called the election when he did. Tell us about the considerations that would have gone into the Prime Minister's decision to call the vote for the 4th of July.
Lizzy Galbraith
Yep. So I think you're right, it definitely was a surprise, you know, half the cabinet wasn't actually in London, and everyone had to sort of run back to actually have the meeting to call the election in the first place. But I think the big thing that went into that was actually the April CPI report that showed inflation falling, but it did also come in a bit hotter than the market had expected. That has pushed back expectations of the Bank of England starting its rate cuts. We were originally maybe thinking it could be June. It's now looking like it could be a little bit later in the year. And the thinking is that maybe those rate cuts, were now going to be coming too late in the year for voters to really feel any difference. If the government had waited for an autumn election, as many people had been expecting they would. I think the other factor is maybe less economic. But certainly, from a political perspective, the polls have been really, really stubbornly flat for the Conservatives. So, over the last year, they've tried lots of different tactics, two tax cutting fiscal events, lots of different policy proposals, and the public just really wasn't interested in any of those ideas. So, in calling the election, we've now effectively created a much more concentrated forum for the Conservative Party to air their ideas and see if the public are any more willing to pay attention now that we have the actual election dates front and centre.
Luke Bartholomew
And Lizzy, I guess the other thing that inflation report did as well as putting back the timing of when the Bank of England would cut interest rates related to that tended to push up market interest rates, as well. And that has important implications for the government borrowing costs. So, I think the government at one point seemed to be planning to have another fiscal event later this year. I mean, how much do you think the impact on debt cost and therefore undermining these fiscal plans might have gone into the thinking as well?
Lizzy Galbraith
Yeah, I think there was certainly hope earlier in the year that the government was going to be able to fit in another fiscal event before heading to the polls and other ideally tax-cutting fiscal event as well. And that doesn't seem to have come to pass. I think the general feeling was that, you know, they weren't going to have the fiscal headroom to be able to accommodate that anymore. So, without that they've decided to go earlier without that fiscal event. And now the next fiscal event that we are going to have will be the next government’s, probably in the autumn.
Luke Bartholomew
Well, you say the next government, so why don't you give us a sense of what the polls are currently showing, what they're suggesting the next government is going to look like?
Lizzy Galbraith
Yeah, I mean, there’s obviously a bit of variation in the polls. I've seen leads recently that sort of vary from about a12-point lead for Labour all the way through to like 23, 24%. But the thing they all have in common is a pretty substantial double-digit lead for the Labour Party. That would be enough to put them into government as a majority. We're not really seeing any substantial shifts from that. And certainly, I think, almost everybody is now predicting a Labour majority government from the 4th of July.
Paul Diggle
And Lizzy the electoral map, the concentration of votes across the country, has at time sometimes disadvantaged Labour. I mean, think Corbin piling up votes, unhelpfully concentrating them, in cities at times. How is that picture changing as Labour gets a swing from say leave voters and a slightly different constituency?
Lizzy Galbraith
Yeah, there have been some very interesting political shifts over this parliament. Definitely Labour's vote has become far more efficient in terms of its distribution. That's really the big change that we've been seeing. It's not that Labour are taking a significantly greater overall share of the vote, it's more that it's far, better distributed when it comes to working with the ‘first past the post’ electoral system. We're also seeing Labour make fairly substantial polling gains in Scotland, that can act as a buffer there as well. We're expecting quite big seat gains there. And the other thing that's also happening is that Reform are taking fairly substantial numbers of 2019 Conservative voters, as well. So, the Conservatives are essentially being squeezed on multiple fronts. And that is enabling this quite substantial Labour lead to build up once you factor in all of these different movements in voting behaviour.
Paul Diggle
So Conservatives will obviously be hoping to close that polling gap during the campaign. Are there reasons to think that Labour's lead is overstated, will fall come election day? What's the optimistic case for Rishi Sunak wanting to close that gap?
Lizzy Galbraith
So, there are there are definitely quite wide variations in some of these polls. And I think that is something that, you know, the Conservatives would point to, that maybe the Labour lead is quite soft, or that the people that are currently saying they don't know who to vote for are maybe being treated very differently depending on the pollster. So, the other thing that the Conservatives would certainly point to is the local election results, where Labour ended up with a projected national vote share that was only nine points above the Conservatives - probably still enough to get a majority at this stage, but nonetheless substantially smaller than we're seeing in some of these polls. So I think that, you know, they would point to some of those factors. But it is worth pointing out that, you know, I don't think that those local election results are necessarily going to be indicative of the final general election result. They did, of course, only take place in England, and you do tend to get a larger share of the vote for smaller parties in local elections as well. So, you know, the Conservatives would point to this polling variation, local election results maybe behaving differently to those polls. But they're pretty small factors when you when you look at the bigger picture and the wider trajectory of these polls as a whole.
Paul Diggle
How much does it matter that the mantle of economic responsibility in the electorate’s minds has potentially shifted from Conservative to Labour? And on the other hand, how much does it matter as the Conservatives might argue, that there's no kind of personal love for Starmer in the country? How do those come into it?
Lizzy Galbraith
I think there is, you know, that we have seen the big break that happened in the polls, where you can see a very substantial drop in the support for the Conservatives and this very big polling gap opening up. It's almost perfectly timed with the Liz Truss mini budget. That does really seem to have broken something in the perception of the Conservatives as the party of, you know, economic management. And I think that's something that the Conservatives have really struggled to address, despite a change in leadership, despite multiple fiscal events now that have gone off without that sort of reaction. It really does seem to have damaged their reputation among Conservative voters. And you're right what we're seeing is more of a rejection of the Conservative Party in the polling rather than a wholesale endorsement of Labour and Kier Starmer. You know, does that matter from a general election perspective? Not necessarily. Labour can obviously still win in those circumstances. But I think where it is definitely going to matter, if you still have that enthusiasm gap, is when Labour no longer are the party of opposition but are the party of government. You could see a very short honeymoon period for an incoming government that has to make some difficult fiscal trade-offs. If there isn't that enthusiasm for their wider platform.
Paul Diggle
Welcome back to Macro Bytes where we're discussing the UK general election and its possible economic implications. So Lizzie, I want to ask about Labour on the economy and perhaps start with their approach to fiscal policy. I mean, I think a lot of Labour's policy agenda has been supply-side focused, aiming for planning reform, regulatory stability, some greater state intervention, and they've been very keen to project a mantle of fiscal responsibility. So how are they thinking about fiscal policy? What fiscal rules are they talking about?
Lizzy Galbraith
So what we've been seeing so far is that the Labour Shadow Chancellor, Rachel Reeves, has been tacking really quite close to the Conservatives on fiscal strategy. It's designed to appeal to those dissatisfied former Conservative voters, who maybe aren't necessarily a fan of voting Conservative again, but do hold concerns about Labour from an economic management perspective. So, what we've seen is Rachel Reeves actually not really promising a lot of change when it comes to fiscal policy. She has been far more focused on ruling things out actually than she has announcing big changes. This week, at the time of recording, she ruled out any tax changes beyond those that Labour have already pledged. Those tax changes are fairly minor in the grand scheme of revenue raises. So, we're also seeing very little change on the tax front. On fiscal rules, again, very little change. Labour have pledged to keep the debt rule, which says the overall public debt should be falling year-on-year as a share of GDP by the fifth year of the official forecasts. They are going to keep that rule. That's currently the rule that the government also subscribes to. They have pledged to tweak the borrowing rule ever so slightly, so that day-to-day spending must be matched by revenue alone, but it would allow Labour to borrow for capital spending, infrastructure spending, for example. But again, keeping that debt rule means that even that fairly minor tweak doesn't really change the overall fiscal position too much. I think there are fairly legitimate questions about whether this approach is going to be sustainable for Labour, given that it does obviously want to do things differently, it has some pretty chunky investments, pledges, and the current government have, of course, pencilled in some fairly substantial public spending cuts in order to meet the current fiscal rules. So whether Labour can, as they've promised to, not raise tax, keep these fiscal rules the same and try to alleviate some of these spending cuts that are planned, it's pretty tricky to see unless, as Labour hope, they can generate some fairly substantial economic growth in quite short order, I think it is going to be fairly likely that at some point Labour do shift to the fiscal rules somewhat. We know that Rachel Reeves has previously spoken about wanting the fiscal rules to better enable long-term public sector investment. So, I think at some point in the future, it's fairly likely that, for example, the fiscal rules change, so that rather than taking into account public sector net debt, they use something like public sector net worth, which would enable a little bit of extra fiscal space.
Luke Bartholomew
So before we get on to the growth strategy, Lizzy, which I think you're right in saying is basically how they think they can square the circle here between the tax commitments, the spending commitments and the fiscal rules. Could you talk a little bit about how the net worth public sector fiscal rule might actually work in practice and the kind of interventions that would make it easier for Labour to pursue, or any government to pursue, if it had that kind of fiscal rule?
Lizzy Galbraith
Yeah, so this is an idea where, essentially, instead of just taking into account public sector debt, you also take into account government assets, as well as the liabilities and that helps you come up with a little bit of extra fiscal space. Labour would argue that it would better take into account the long-term value of things like infrastructure spending, capital expenditure, which would be a better reflection of the long-term value of government spending, rather than just considering it in terms of the amount of debt that spending generates. I think the plan would be to go to the OBR first and foremost and to see if the OBR can conduct an assessment to see whether or not switching the rule to something like public sector net worth is actually possible in practice - whether it's something that LBR would consider being able to use as part of its pre-budget forecasting. And I think that would then be the basis of whether or not Labour could make a change like that. And as I said, the the real kind of change would be that it would probably better take into account the long-term effectiveness of this infrastructure spending that Labour want to prioritise when in government if they can actually make this work in practice. And I think the idea would be that if the OBR give it a seal of approval, you would then have confidence as a government that you could do this without a negative market reaction for changing the rules on principle.
Luke Bartholomew
And then, so turning to the growth strategy, which has sort of gone under quite a few different rubrics over the last couple of years, sometimes they've called it ‘supply side progressivism’, or ‘secureonomics’, or at times they've flirted with calling it ‘Bidenomics for the UK’, but essentially it seems to be the idea to use the state to boost private sector growth, by sort of crowding in the private sector through various sorts of initiatives and policy changes. And that comes through on the planning side, on foreign policy to an extent as well. But perhaps if we start on the planning side, which is often cited by economists, the IMF and the like, as a key constraint on UK trend growth. I mean, arguably, that is where some of the low hanging fruit sits in terms of boosting the UK's potential growth and Labour has certainly talked a big game on reforming the planning system. I think they've talked of driving bulldozers through planning regulations at some point. So specifically, what are they proposing to do to the UK is planning system?
Lizzy Galbraith
So we have yet to have the manifesto. So, some of this is a little bit sketchy when it comes to the detail still, but we have seen Labour really focus on planning as one of their priorities for the first 100 days of being an office. It's something that we would expect a Labour government to really get on and try and implement quite early on in their term, given how much how much it matters for actually achieving some of their wider goals. And certainly, a Labour government probably is going to find it politically easier to implement substantial planning reform than a Conservative government would - just because of where those seat concentrations tend to be. Some of this is going to focus on house building. It's become a bigger part of the Labour planning agenda as we've got closer to the election. So, Labour have a target of building 1.5 million homes over the next parliament. It's essentially a restoration of the old Conservative government's target, which was relatively recently dropped. It is worth noting that even with planning reform, that sort of house building target is a very ambitious one. Governments do tend to struggle to meet any form of house building targets, let alone one this substantial. We may well see that house building target become mandatory with the ability of central government to effectively override local authorities that are deemed to be blocking substantial housebuilding developments that would enable them to meet their targets.
They also are looking at whether or not reviewing greenbelt areas, to re-designate some of these areas, to make it easier to develop is also something that that could be done. And certainly Labour see a greater role for the state in the planning system. So this idea that public-private partnerships across infrastructure, are more likely to result in substantial private sector investment, Labour's thinking goes, if there's some public money in there as well, and labour see a role for central government in effectively directing and driving development projects to ensure they occur where Labour deemed them to be of most value. And for wider infrastructure, you're looking at some fairly easy wins early on, like updating national policy documents to provide more clarity on what sort of developments you want to see in certain areas - and where.
Paul Diggle
So Lizzy planning is one kind of leg of how the Labour Party would hope to boost growth. Another leg is green industrial policy. Although the money that Labour have kind of committed behind their green industrial policies as fall over time, I think running through Labour Party thinking is, a bit like in Bidenomics, there's sort of a divine coincidence between boosting the economy and jobs policy and green policies. That is, building out domestic energy, climate sectors, can deliver both. Now also in Labour's telling, like in Biden's, that's inflected with the language of national security and as well, they're strategically important industries. Reeves as called that securonomics at points in time, and actually also there's sort of a quadruple divine coincidence because also how perhaps the centre left talks about bringing voters back from the populace - you know you provide the jobs, you provide the energy transition, provide the strategic security in a more uncertain world - and that's how you kind of shore up the centre ground. What are Labour's policies around green industrial policy, the energy transition, securonomics? And is that kind of you can have your cake and eat it through green policy going to stand the test of the real world?
Lizzy Galbraith
Yeah, I mean, you're right, Labour certainly see a lot of opportunity here. I think it is very notable that when they talk about this securonomics, green industrial agenda, they really do frame it in terms of economic opportunity, rather than something that you do just to decarbonize and is good for the planet. They do see this as something that can really appeal to some of those red wall seats, for example, that have de-industrialised that they need to win back in order to get back into number 10. So, in terms of what we are expecting from Labour, less public money than we'd originally expected, I think it is a pretty safe bet. The 28 billion pound a year green industrial pledge has been scaled back. It's now roughly speaking 28 billion over the course of Parliament. So Labour are essentially saying now that the whole policy still stands up, we still want to direct investment towards renewable energy, we still want to direct investment towards decarbonisation of homes, upgrading the national grid, all of this is still a priority for us, but we want to use private sector money to do it and public sector money is a smaller piece of this pie now. So some things are still going to happen. We are still going to see the creation of a national wealth fund to finance some of this from the public sector side. But that now has a target of attracting three pounds of private sector investment for every pound of public sector investment that is made. So, you essentially see Labour talking about taking a minority role in some of these nationally important infrastructure projects. And then for GB energy, their role is to act as a means of financing, maybe smaller pilot projects, or more innovative energy projects, for example. So, there's a bit of a mixed bag there. But certainly the big change here is that the private sector, the role of the private sector, has been significantly enhanced in Labour's plans and Labour see the role of the state as again directing the flow of investment towards the projects it deems to be of most value and to build confidence in the ability of these projects to reach completion as well. The confidence of private investors in state projects has been dented because of you know, changes in government policymaking, inconsistent policymaking. And that's something that Labour feels they are able to change in office as well.
Paul Diggle
What about this idea that, that you can have both an investment policy, a jobs policy that is also green? Can that kind of divine coincidence always hold and I think here about, you know, not approving oil and gas exploration licences in the North Sea. Sometimes that's criticised from a jobs perspective, or one might think of, in the US’s case, recent tariffs that the US introduced on Chinese EV imports into the US. So they were in a way choosing the national economy over actually a cheap way to the nergy transition. These tradeoffs do happen. So Labour, how's it thinking about that, that potential tradeoff?
Lizzy Galbraith
I think it's fair to say it's not really a tradeoff that it's fully acknowledged exists yet, as you tend to get in general election campaigns. You know, the full complexity of policymaking is rarely acknowledged. But I think the reality is that you know, when it when it comes down to it, Labour, again because of these fiscal constraints that we've mentioned, are going to have to choose the option that accounts for the greatest possibility of economic growth, and I think it's unlikely that you know, perfect is going to be the enemy of the good when it comes to policymaking. When growth is such a priority for this government, especially if it's looking for a second term in office as it as it obviously will be. It's going to have to have something to show for these ideas and for the change that they're arguing they can bring and that has got to be growth. So, you know, will they be putting the green transition ahead of that? I think it's extremely unlikely given the circumstances that Labour will be entering into government in.
Luke Bartholomew
Perhaps another constraint, along with growth, that makes this sort of divine or quadruple coincidence, whatever we're calling it, a little less neat than it seems, is sort of the changing geopolitical environment as well, rising protectionism in the US perhaps, China's industrial might when it comes to producing certain key industries that are involved in the green transition, the EU trying to work out what its response is going to be. We can talk about the EU in a moment, but in terms of how Labour is thinking about its relationship with the US, China, how its positioning itself in this rising protectionist world, what is their policy on that front?
Lizzy Galbraith
So, the Shadow Foreign Secretary, David Lammy, has called Labour's approach ‘progressive realism’, which is that, you know, progressive ideas must be kind of part of Labour's foreign policy, but nonetheless, they need to take the world as they see it. And you again, perfect cannot be the enemy of the of the good when it comes to foreign policy. So, you know, we are likely, I think, to see a bit of a shift on China policy, I think the current government has been fairly reluctant to really get involved in some of the supply chain realignments, and a more hawkish position on China that we've seen from the US, for example, and to a lesser extent, the EU. Labour are more likely, I think, to follow that path, maybe not with tariffs, but certainly with potentially a greater interest in some of this supply chain realignment, again, maybe thinking about some of the economic opportunity that can be built from that. And I think there's also going to be potentially a greater emphasis on human rights policy in Labour's foreign policy as well. They've talked about that, as well as, using Brexit as a reason to restore trading relationships with some other trading partners outside the EU, particularly those countries that that used to be part of the British empire. And Africa strategy, I think, is making a bit of a comeback as well. And we have seen Labour not commit to the increase in defence spending that the Conservatives have, but certainly said that it's not going to be cutting defence spending. It does see a Britain in the wider world as being a core part of their security strategy as well. So, it's currently I think, more on the diplomatic side than on the security side at the moment. And the big looming thing, of course, is the US election and what sort of US government a Labour government would have to deal with. Biden, I think it's very straightforward. We know that Labour has fairly good links in with Biden's team already. That should be a fairly straightforward relationship. Trump I think maybe a little bit more work for a Labour government. There are maybe fewer natural policy crossovers between a Labour government and the Trump administration.
Luke Bartholomew
And then on the EU, the Trade and Co-operation Agreement, so the UK’s withdrawal agreement and new trading agreement with the EU, is up for review in 2025. I think Labour hope to use this to renegotiate a somewhat closer tie, which they hope will boost trade and growth again, part of that supply side strategy. But given the political constraints at home and the EU's own interests around this, what sort of deal do you think a Labour government would be looking for and then ultimately could negotiate?
Lizzy Galbraith
So yeah, Labour are looking for something that actually brings the UK quite close to the EU - certainly on regulatory standards, they're looking at opportunities to reduce some of these trading barriers that have cropped up since the UK left the EU. They’re far more comfortable with regulatory alignment than the Conservative Party tend to be. So that's less of a hurdle for Labour to agree to when it comes to negotiations with the EU. So, I'd expect things like mutual recognition of professional qualifications, as an example, that feels like a relatively easy point of agreement for a Labour government that the Conservatives were less keen on for example. So, there are certainly some easy wins when it comes to reducing trade friction that I think Labour can agree on. But politically, it will be extremely unlikely to be able to agree anything like to return to the customs union or single market for example. And from an EU perspective, it is going to still want to, for lack of a better term, maintain some sort of penalty for Brexit. You can't have, you know, the full benefits of being within the EU if you are out of it. So I think Labour can certainly improve the trading relationship, remove some of those frictions, but it is not going to be able to get everything that it wants, because it feels that it can't rejoin any of these major agreements and that is going to keep the UK on the outside looking in when it comes to, you know, full regulatory trading arrangements with the EU.
Luke Bartholomew
Alright, well, I think that is all we have time for this week. So as ever, please do like, subscribe, wherever it is that you get your podcasts and then all that remains is for me to thank Lizzy for joining us and to thank you for listening. So thanks very much and speak again soon.
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