How will the UK economy react to the general election?

What’s your thoughts?

The current state of the UK economy is best described as bullish. Surveys from the services sector and manufacturing sector are optimistic and employment numbers peaked in 2016. This, despite rising prices and limited PDI levels. One of the concerns in the UK economy remains slow wage growth. If spending contracts in 2017, this will invariably impact the UK economy in terms of GDP. The upcoming election on June 8, 2017 is a big one for Prime Minister Theresa May and the Conservatives.  

If the Tories manage to hold onto their majority and increase it, they may be better positioned to negotiate from a position of strength domestically. Some of the major election ideas include universal income and limits on energy prices. Since Q1 2013, the UK economy has grown consistently for 17 quarters. This is a marked reversal from the sharp economic downturn that was evident between Q2 2008 and Q2 2009 during the global recession.

Conservative and Labour party principles

In terms of reaction to Tory party principles, just 8% of SMEs are confident about the ideas touted by the Conservatives. The Tories are looking to increase borrowing within the next two years to accommodate any Brexit-related shocks that ensue. The 2013 Conservative party manifesto calls for a balanced budget by 2025. No increases to VAT will be undertaken, and corporate taxation will be reduced to 17% within 3 years. This would place UK corporate tax at the bottom of all developed economies.

The Tories are also seeking to fully digitize the UK economy in terms of FinTech, big data, networking, skills, and other aspects. The personal tax rate of 40% will also be raised to the £50,000 threshold by 2020. These are major fiscal changes which have the capacity to dramatically reshape the UK economy. On the other side, the Labour Party is looking towards increased fiscal spending to kickstart the economy. They are likely to maintain debt at its current levels, and impose additional taxes on businesses. If Labour gets its way, the tax rate will rise to 26% after 2020, up from its current level of under 20%. Labour is also intent on raising the minimum wage in the UK to £10 per hour within 3 years. Other proposals include land value taxes.

Are UK business credit lines drying up?

The Bank of England recently reported that personal debt levels in the United Kingdom have topped £1.529 trillion. This represents the highest level of personal debt since the 2009 global financial crisis. Of that, credit card debt is the main contributor. Upwards of £67.6 billion is owed in credit card debt among UK consumers. The problem with rising debt levels comes with rising inflation rates. As the cost of goods and services increases in the UK and wages remain constant, spending rises too.

Weak economic wage growth is driving burgeoning levels of debt in the UK. According to StepChange Debt Charity, the number of UK credit card holders requesting debt relief in 2016 hit 600,000. More concerning is the debt burden borne by the average individual – now at £14,251. This marks the first increase in overall debt levels in 8 years. Of those currently in debt, 1.1 million are using high-cost credit to finance their living expenses, while a total of 8.6 million people are using credit to pay for their expenses.

A Brexit blueprint is needed

There are several reasons why UK credit utilization levels are up, notably low interest rates. Also, businesses are concerned about the impact of a Brexit on their profitability. Therefore, they are purchasing whatever they need before a possible credit crunch dries up access to lines of business credit. The FCA (Financial Conduct Authority) is prepared to step in to provide relief to anyone in persistent debt (18 months of high debt) by forcing banks and credit institutions to offer relief to clients.

The total amount owed in 1993 for personal loans, car loans and overdrafts was £41.7 billion. Fast forward 24 years and that amount has tripled to £129.8 billion. If the UK economy is going to turn the corner post-Brexit, a blueprint for the UK’s extrication from the EU and a path forward is required. That’s why the outcome of this general election is so important.

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