German industry wary as Brexit overshadows lavish UK election vows | Business| Economy and finance news from a German perspective | DW | 11.11.2019
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German industry wary as Brexit overshadows lavish UK election vows

Both Labour and the Conservatives have been promising plenty ahead of the UK general election in December, with the big focus on a massive borrowing binge. German industry thinks the Conservatives are "the lesser evil."

There are many British voters who would prefer if the campaign for the December 12 UK general election didn't even feature the word Brexit.

Although how on Earth could it be any other way? The Christmas election effectively doubles up as a referendum on Brexit, one of the biggest constitutional questions modern Britain has grappled with.

The parties have staked out their territory pretty clearly on that question. But as with almost all elections, the question of the economy looms large behind any politician's talk of what they would do when they get into office. So how much attention has that been getting?

Quite a bit, it turns out. Recently, the two main parties — Labour and the Conservatives — have laid out some economic policy plans ahead of the release of their official manifestos.

If their plans are anything to go by, then you could be forgiven for wondering why Brexit matters at all as both are planning massive spending binges and investment drives, apparently unencumbered by the potential fiscal disruption of leaving the EU.

The Borrowers

The Labour Party says it would dramatically ramp up borrowing to around €464 billion ($513 billion) over a 10-year period in order to fund a major national capital investment program. In the 2017 general election, the pledge was to borrow €29 billion a year but John McDonnell, the party's prospective chancellor of the Exchequer (finance minister) says they will up that to €64 billion a year for five years if elected.

Jeremy Corbyn (picture-alliance/empics/A. Milligan)

Labour leader Jeremy Corbyn has pledged to open the doors to vast UK borrowing

Jeremy Corbyn's party says it would use the money to more than double capital investment to over €116 billion per year to spend on transport, energy, health, housing and education.

The director general of the German-British Chamber of Industry & Commerce, Ulrich Hoppe, told the German news agency DPA Monday that Brexit was a real headache. At the same time, he indicated that German industry viewed Labour's economic plans as an even bigger threat, saying "it's  a matter of identifying the lesser evil [the Tories]."

"Given Corbyn's planned nationalization and redistribution plans, important economic incentives will disappear," Hoppe argued. "This means that many consumers will have left less in their pockets in the medium term to buy goods, and German companies active on the UK market will feel the pinch of this policy."

The Conservative party hasn't exactly been preaching frugality either. Current Chancellor of the Exchequer Sajid Javid says his party would also ditch existing fiscal discipline rules to borrow around €23 billion a year to spend on investment.

But Javid and the Tories have identified Labour's economic policies as a weak spot to target, and an opportunity to preach their own supposed economic credibility. Last week Javid spoke of "Comrade Corbyn" and his "fantasy economics" and spoke of the need to stop running an overdraft on day-to-day spending.

Some Conservatives want the party to pledge higher spending and tax cuts in their manifesto but Javid's argument that the party needs to keep a tighter limit on day-to-day spending, beyond capital investment, has won out.

New fiscal rules announced by the chancellor commit the government to running a balanced budget within three years, something which will greatly curtail Prime Minister Boris Johnson's options for spending or tax promises in the official manifesto, whenever it is released.

While Johnson to a degree accepts the argument that the Tories need to distinguish themselves from Labour on the subject of fiscal prudence —  "the Labour Party always runs out of other peoples' money" was one of his preprepared lines at the Tory campaign launch —  some of his earlier promises will be difficult under Javid's rules.

For example, his vow to raise the higher rate tax threshold from 50,000 pounds (€58,000) to 80,000 pounds would cost 8 billion pounds alone, more than the 7 billion pounds of headroom for tax cuts or extra spending that the rules would allow.

A taxing question

Labour hopes McDonnell's massive borrowing and spending promises will sway voters sick of a decade of austerity. The party says it would spend €175 billion on a social transformation fund focused on healthcare, education and social housing.

Another nearly €300 billion is earmarked for a green fund that would target energy and transport networks in order to meet the UK's carbon targets.

Borrowing vast sums of money at low interest rates, as both Labour and the Tories plan to do, is one thing. Tax cuts, or indeed, tax rises are something very different and are issues that can come to dominate an election campaign.

On that topic, the Conservatives' aforementioned pledge to raise the higher rate tax threshold is their main promise. Labour have yet to publish specific tax plans but Corbyn has said that his party's tax moves will affect 5% of the population, with 95% to benefit from them.

In 2017, the party said it would target those earning €92,000 and up with a 45% tax rate. That rate currently only kicks in for those earning almost double that.

It's the economy, stupid?

Despite three and half years of uncertainty over Brexit, and the various predictions of catastrophe, the British economy is in reasonably decent, if less than robust, health.

Since the 2016 vote, the British economy has grown at an average quarterly rate of 0.4%. Historically it's not much to write home about, but it compares quite well with similar economies around the world over the same period.

Symbolbild: Preppers - Briten kaufen wegen Brexit auf Vorrat (Getty Images/J. Taylor)

The UK economy has held up reasonably well since the Brexit vote

One intriguing metric ahead of the December 12 vote is the percentage change in the value of real wages. The Office for National Statistics shows this to be on a steady rise since the 2017 general election, boosted by extra government spending.

Data for the last three UK general election shows that when real wages were rising as they are now, the incumbent won (David Cameron in 2015) while when they were falling, the incumbents lost (Gordon Brown in 2010 and Theresa May in 2017).  That suggests that regardless of the promised largesse, voters might stick to what they can hear jingling in their pockets when standing at the ballot box.

It's Brexit, stupid!

Given how much uncertainty remains over Brexit though, there is something faintly farcical about these various economic and spending pledges. With the terms of the UK's exit (or even the simple fact of the exit) yet to be determined, let alone the nature of its future relationship with its most important trading partner, dwelling too much on economic electioneering seems foolish.

Most voters agree. According to the latest YouGov poll which asked voters to rank the three most important issues in the election, 59% said Brexit compared to 29% for the economy.

Not that the two are mutually exclusive. Estimates by the UK government itself says Britain will lose up to €150 billion in GDP, or 6.7% of its expected growth path, in the next 15 years if the current withdrawal deal goes through. Leave without a deal, and the percentage swells to nearly 10% .

It would be interesting to see how the current wave of promises would hold up in those scenarios.

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