UK fiscal policy must tighten from election promises

Subject

Parties' economic policy promises in the May 7 election.

Significance

The tightest UK election in years is taking place at a time when growth prospects are uncertain. The closeness of the race is encouraging all main parties to make unrealistic tax and spending promises. The likelihood of political uncertainty, the nature of some party policy positions and the possibility of some form of Labour/Scottish National Party (SNP) government are prompting investor and market concerns. Some party proposals, especially on tax, would damage UK residents or companies; some large companies are threatening to leave the country.

Impacts

• Especially if Labour forms the next government, some large companies could relocate their headquarters from the United Kingdom.
• If the Conservatives form the government, the risk of a UK exit from the EU will rise, heightening international business concerns.
• Labour and the SNP have the closest economic policy positions among the main parties.
• If the SNP holds the balance of power, it will extract -- often fiscal -- policy concessions from the UK government.
• Greater Scottish fiscal powers will strain the UK fiscal transfer formula. Adjusting this could increase the risk of Scottish independence.