UK faces strained finances after election

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Britain will see little difference on public spending whichever of the country’s main parties wins next month’s general election, with state coffers strained largely by huge Covid expenditure.

The main opposition Labour party, widely predicted to defeat the ruling Conservatives in the national vote on July 4, has promised investment in key areas such as health and education but also stresses the need to balance the books.

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The Conservatives, led by Prime Minister Rishi Sunak, are promising tax cuts they claim will not trigger fresh chaos on markets.

‘Similar policy’

“Both parties are offering very similar fiscal policies, there’s a piece of paper between the two of them,” Daniel Sopher, senior partner at tax specialists Sopher + Co, told AFP.

“However, the way that they will manage the economy will be completely different, one focusing on tax cuts and the other focusing on investment and long-term strategic plans such as the zero-carbon strategy.”

Keir Starmer’s Labour and the Conservatives are seeking to avoid a repeat of October 2022, when the latter’s unfunded tax cuts unveiled in a budget spooked markets and tanked the pound.

It also sank the chaotic premiership of Liz Truss, who lasted just 49 days before she was replaced by Sunak.

Britain’s economy is currently on a more stable footing after exiting a mild recession and as inflation returns to normal.

The situation also appears calmer compared with neighboring France, whose upcoming snap election has triggered higher borrowing costs for the country’s government.

President Emmanuel Macron threw France into turmoil earlier this month by calling the vote after his centrist party was trounced by the far-right National Rally (RN) in European elections.

The French vote is shaping up as a showdown between the RN and the leftist New Popular Front, which is dominated by the hard-left France Unbowed.

Investors are concerned by the parties’ high spending pledges.

‘Safe haven’

In Britain, Labour promises a firm grip on spending should it win power.

“I want investors to look at Britain and say it is a safe haven in a turbulent world, a place where I can invest with confidence in a world where perhaps other countries are tilting to more populist politics,” Labour finance spokesperson Rachel Reeves told a recent gathering of business leaders.

She has also said that “change will be achieved only on the basis of iron discipline”.

British public debt has flirted with a level totaling 100 percent of gross domestic product in recent months -- a situation not seen since the 1960s.

“The reason for Starmer’s popularity... (is) because he offered a changeless change,” said James Wood, senior teaching associate in political economy at the University of Cambridge.

“He basically is a Conservative in a red tie,” Wood said in reference to the color associated with the Labour party and Starmer’s prudence around spending.

Higher taxes?

Should Labour win with a big majority, as some polls suggest, the party’s leadership may feel pressure from its own members to relax budget rules, according to analysts.

“I don’t think that anyone in the markets will be made nervous by yet another change of the fiscal rules,” said Jonathan Portes, an economist at King’s College London, noting that the Conservatives have altered them numerous times since winning power in 2010.

“Obviously the fiscal rules are going to change, the question is how will they change and will they change in a way that is sensible.”

According to Sopher, whichever party wins power, “tax is going to go up” to fund public services.

“There’s only so much limit to what one can increase debt to,” he added.

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