UK: Labour’s plans brush up against fiscal realities

Should Labour win the UK election next year, we doubt it would be able to generate a marked improvement in UK GDP growth in its first term. Inheriting a poor fiscal position from the current government, high debt servicing costs, and restrictive fiscal rules will limit its room for manoeuvre.

What you will learn:

• The UK’s Office of Budget Responsibility’s latest fiscal projections are based on policy being tightened significantly after the election. A rise in gilt yields means that next month’s forecast update will likely push the government towards assuming an even greater post-election tightening of policy. Dealing with this inheritance will be problematic for the next government.
• Current plans imply large departmental spending cuts in real terms. Given its relatively modest plans for raising tax receipts, it’s hard to see how Labour could reduce these spending cuts, increase NHS spending, and implement its green prosperity plan. Boosting growth or lifting poor public sector productivity growth will be key to creating more fiscal space.
• Labour’s focus on planning reform and housebuilding are positives. If ambition is matched by delivery, these policies could boost growth. But most of these gains – and the bulk of the boost from its spending on clean energy projects – would likely only accrue in a second term.