As widely expected, Labour won a majority in the UK General Election on July 4th.

They achieved a 174-seat majority, which should enable them to progress their political decisions through parliament with relative ease.

As expected, the results had a minimal impact on the financial markets, which continued to function as usual.

Economic Outlook

In the grand scheme of things, at least from a macroeconomic perspective, there is little difference because of the UK General Election, regardless of political affiliation between the former Conservative and the new Labour Government—at least in the near term.

The reality is that there isn’t much spare money at the moment, so choices are limited.

The previous government had two main fiscal rules, which are restrictions on fiscal policy designed to constrain its own decisions on spending and taxes.

Labour has pledged to keep these rules to maintain financial stability. The rules are as follows:

  • Debt should be on course to fall as a share of national income in five years’ time.
  • Public sector borrowing should not exceed 3% of GDP in five years’ time.

The first rule receives a lot of criticism as it allows a government to raise debt in the first four years of its plan as long as it is falling in year five.

Post UK General Election

As a result of the UK General Election result, this means that in the early part of their term, when a budget is announced, a government can postpone spending cuts to year five of the plan, effectively kicking the can down the road for another day.

These rules will constrain Labour from materially increasing spending or borrowing, which are the two main ways a Government could cause an increase in interest rates.

Therefore, interest rate expectations are largely unaffected by the change in Government.

Labour will undoubtedly want to increase Government spending to revive our strained public services. The problem is, where does the money come from?

Labour can only materially increase spending in the short term by either changing the fiscal rules (which Rachel Reeves, Chancellor of the Exchequer, has ruled out) or increasing taxes.

Tax Promises

In the run-up to the UK General Election, Labour ruled out increasing the main forms of personal taxation: income tax, national insurance, and VAT. She has also ruled out raising corporation tax. Read more here

These taxes account for three-quarters of current tax revenue. Therefore, ruling tax hikes out in these areas limits the scope for major revenue increases in tax unless there is a significant change to the current tax system (which is unlikely)

Therefore, we will have to wait for economic growth to return before we can experience materially higher government spending. Growth is at the heart of the Labour plans, so if this is unlocked, it would naturally lead to more government revenue without increasing the rate of taxes.

It is worth noting that while all governments aspire to high economic growth, this doesn’t necessarily mean they will achieve it.

We will learn more about Labour’s plans on taxation and spending following the Autumn statement, which will likely occur in October / November this year.

What does the UK General Election result mean for the housing market?

Below are the key policies the Labour government set out to achieve in their manifesto:

  • Deliver 1.5m homes over the next five years while undertaking extensive planning reform to unlock infrastructure investment and housing construction.
  • Introduce mandatory local housing targets and bring forward the next generation of New Towns.
  • Devolution to mayors, with stronger powers over planning and control over housing investment.
  • ‘Planning Passport’ for urban brownfield development, with a fast-track approval and delivery of high-density housing on urban brownfield sites.
  • A Freedom to Buy Scheme to help people secure a mortgage.
  • Tax foreign buyers to fund planning officers.
  • First dibs for local people on new developments, ending the farce of entire developments sold off to international investors before local people get a look in.

There are certainly policies focusing on first-time buyers (FTBs), but nothing radical.

Will Labour’s plans for financial services affect you-read more here

Planning reforms have been proposed to try to increase the supply of housing, which has long been an issue for FTBs. Housing is in short supply and often unaffordable for potential buyers looking to get on the housing ladder.

Despite the target being a significant improvement on the status quo regarding house building, it is unlikely to negatively impact house prices due to the current mismatch between demand and supply.

Cynically, all recent governments have attempted to increase the housing supply and have yet to reach their initial targets.

Maybe the planning reforms will be different this time— time will tell.