Vote early, vote often!
Peter Warburton - 19 April 2017
A general election in 2015, an EU referendum in 2016 and now, another general election in 2017: the lure of the ballot box is compelling. Is this a stroke of genius or a disastrous misjudgement, following on the heels of Gordon Brown in 2007 (who should have sought his own mandate but didn’t) and Edward Heath in 1974 (who sought a stronger mandate and lost)? Is Theresa May on the way to comfortable victory and an overall parliamentary majority of 100-plus seats, or could her plan backfire at the hands of a blocking minority of anti-Brexit candidates?
Behind the political judgement there is a critically important economic judgement. Thus far, the UK economy has proved pleasingly resilient in the wake of last June’s decision to separate from the EU. However, the impenetrable nature of the post-Brexit resolution translated into a steep discount for Sterling. A tidal wave of externally-driven inflation is beginning to crash over British shores, exposing households and businesses to potentially vicious income and profit squeezes, respectively. The landscape will change little over the next 7 weeks, but over the next 7 months the transformation will be obvious. May is seizing the day in more ways than one.
Might not the squeeze on domestic household and business spending be fully offset by stronger export growth and weaker import growth? The difficulty with this argument is that global trade volumes are in poor shape. The competitive benefits gained from currency depreciation are minimised when the world trade elasticity is historically low. Even a 16 per cent currency drop, on a Sterling index basis, might achieve only a 4 per cent to 8 per cent boost to UK goods export volumes. In short, the extra income earned from external trade will not be sufficient to compensate for the real income losses sustained over the coming year.
This reopens the issue of the fiscal outlook. Philip Hammond, far from reducing the number of budgets will need to prepare an extra one, supposing that re-election is accomplished. While his disposition will be to press ahead with budget deficit reduction through public expenditure control, the political urgency of such a strategy has evaporated. The government is engaged with spending restraint on multiple fronts: NHS provision of acute healthcare, a creaking social care system, education budgets strained by a rising school-age population, the escalating cost of counter-terrorism and the risk of new military involvements. The political pressures to expand spending and postpone deficit reduction will become even greater as the year wears on.
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