Five Big Predictions for the Post-Election Economy

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Total views: 185 | Word Count: 951 | Date: Mon, 31 May 2010 | 139 comments

With the General Election campaigns already in full swing, Britain is destined to become a very different place before too long. But just how different exactly?

Post-credit crunch reality has set in and whichever party gets into power will have some tough economic decisions to make if they want to reduce the budget deficit and bring us back to prosperity.

We asked some of the UK's leading economists and experts to predict what the country would look like a year on from the election, and here are their views...

1. Unemployment to reach 3 million

Labour has congratulated itself on minimising job losses during the recent recession, keeping unemployment down to the latest recorded level of 2.45 million - far below the government's own predictions. But, according to the Institute of Employment Studies (IES), jobless levels could soon do a U-turn and rise again.

"The big question in the labour market is ‘What is going to happen in the public sector?'" he said. "Basically, what has happened in the last 18 months is that public sector has continued to grow, and that's [a] reason why unemployment hasn't fallen by as much as expected," said Jim Hillage, director of research at IES.

But in the recent Budget, Labour announced that it is to make billions of pounds of savings by making public services more efficient, while the Conservatives also aim to make cuts to the sector. It is still unclear how such savings will be made, though, with Hillage adding: "If, as is likely, there will be a contraction in public sector employment after the election, regardless of who gets in, then it could be that unemployment starts rising again and could reach 3 million."

2. VAT to rise whoever is in power

While the public has come to accept taxes are likely to increase over the next few years, the debate rages on among politicians over when and where to take the money from.

While the Liberal Democrats plan ‘savage' cuts to public spending and increased tax on high earners, the Conservatives have committed to a programme of tax cuts and efficiency measures they say will prevent them from needing to raise National Insurance Contributions. This is something Labour argues will be unaffordable without raising VAT.

John Whiting, tax policy director at the Chartered Institute of Taxation (CIOT), believes that all parties are ignoring the reality when it comes to VAT. He says: "I find it hard to see how we can close the gap in spending versus money raising in a reasonably short period of time ... without including VAT in the equation. It's interesting that other countries, Germany, for example, have resorted to VAT increases to help close their gap."

3. Deficit to be cut far slower than promised

Something is definitely wrong with the economy when political parties are falling over themselves to promise the harshest spending cuts but that is what's happening , as each of the ‘Big Three' attempt to prove they have what it takes to cut the country's massive budget deficit.

Despite this, the chief European economist at Capital Economics argues that the differences between the three different economic plans are "pretty small", and are all unlikely to cut the budget gap anywhere near as quickly as promised.

"Under any government I suspect that the budget deficit will come down rather more slowly than the current plans actually suggest, even under the Tories," said Jonathan Loynes. "The economy will be weaker, and that will indicate the need to push government borrowing higher."

In his final prediction, he argues that economic growth will be restricted for at least four or five years due to governmental focus on cutting the deficit.

4. House prices to struggle

With housing commentators and indicators differing wildly over which direction the housing market is going, it's very difficult to say what's going to happen in the year following the election. However, while activity looks to have slowed ahead of 6 May, Martin Gahbaeur, chief economist at Nationwide, doesn't think the election outcome will be of "long term relevance" to the housing market.

"In the long term, I think housing market performance is going to be determined by fundamental factors such as affordability of housing and the availability of credit," he says - adding that there is little chance that house prices will grow "in excess of average earnings growth" over the next year.

5. Low interest & low inflation for some time

Inflation has been bumping up and down for some time, but Capital Economics' Jonathan Loynes believes it will remain relatively subdued for some time, thanks to the effects of the recession.

He also suggests that the Bank of England will keep interest rates at a low level for several months at least - keeping homeowners happy, but spelling continued gloom for savers. However, this may well depend on just how harsh the impending cuts in public spending and increases in taxation are and who gets into power.

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In the mean time, it might be a good time to check your credit cards and savings deals to make sure you are ready for whatever happens post-election.

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