The economics of the 2017 General Election

Tomorrow the United Kingdom goes to the polls for a General Election. Yesterday’s anniversary of the D-Day invasion of Normandy in France reminded us that the ability to vote is a valuable thing that people have fought and died for. Let me repeat my usual recommendation to vote albeit with the realisation that as far as I can see it has been an insipid and uninspiring campaign. Time for “none of the above” to be on the ballot box I think.

Moving to economics there have been a couple of reminders over the past 24 hours that some themes remain the same. From BBC News.

RBS has finally reached a £200m settlement with investors who say they were duped into handing £12bn to the bank during the financial crisis.

The RBS Shareholders Action Group has voted to accept a 82p a share offer.

The amount is below the 200p-230p a share that investors paid during the fundraising in 2008, when they say RBS lied about its financial health.

If you look at the sums you see that the compensation is nowhere near the problem if you feel that there was a misrepresentation back then. Also as there was a 1:10 stock split back in 2012 is this not really an 8.2p offer? As to the theme of there being no punishment for bank directors there is also this.

A settlement means that the disgraced former chief executive of RBS, Fred Goodwin, will not appear in court.

Of course the UK is not alone in such machinations as I note this from Spain today. From Bloomberg.

Banco Popular Espanol SA was taken over by larger Spanish competitor Banco Santander SA after European regulators determined that the bank was likely to fail…..

The purchase price was 1 euro, according to the statement.

Santander plans to raise about 7 billion euros ($7.9 billion) of capital as part of the transaction. ( Bloomberg ).

That much? The situation has been summed up rather well in a reply to the article.

Santander could be buying a time bomb filled with bad debt. What is the CEO thinking? Why should shareholders bail out Popular?! ( @ ken_tex )

We are left with a general theme that the banking sector carries on regardless and simply ignores things like elections. Democracy has not reached the banking sector. There is a British implication as of course Santander is a big player in UK banking and as an aside this sees the first bail-in of a so-called Co-Co bond.

How is the economy doing?

We have the Bank of England with its foot hard down on the monetary policy pedal with a Bank Rate of 0.25% which as far as I can recall has barely merited a mention in the campaign! Amazing how that and £445 billion of QE ( including the Corporate Bonds) can be treated as something to be pretty much ignored isn’t it? Partly as a result of this we are facing a spell of higher consumer inflation which will lead to a contractionary effect on the economy due to the way it seems set to reduce real wages. But again this seems to have been ignored. Of course the Bank of England will be happy to be outside of the political limelight but when it is such a major part of economic policy there should at least be a debate.

Fortunately the edge has been taken off things by the decline in the price of crude oil back towards US $50 in Brent Crude terms and the rally of the UK Pound to US $1.29. This is a factor in the Markit business survey telling us this on Monday.

The three PMI surveys are running at levels that are historically consistent with GDP growing at a robust 0.5% rate, albeit with the slowing in May posing some downside risks to the near-term outlook.

So the economy continues to grow but at a slow pace overall. Of course the Bank of England will be concerned about this reported this morning by the Halifax.

House prices in the last three months
(March-May) were 0.2% lower than in
the previous three months (DecemberFebruary).

The mood of Bank of England Governor Mark Carney will not be improved by this as it refers back to a time before it began its house price policy push in the summer of 2013.

Prices in the three months to May
were 3.3% higher than in the same
three months a year earlier. This was
lower than April and is the lowest annual
rate since May 2013 (2.6%). The annual
rate is around a third of the 10.0% peak
reached in March 2016.

The Bank of England will also be worried by this signal that emerged yesterday. From Homelet.

UK rental price inflation fell for the first time in almost eight years in May, new data from HomeLet reveals. The average rent on a new tenancy commencing in May was £901, 0.3% lower than in the same month of 2016. New tenancies on rents in London were 3% lower than this time last year…….This is the first time since December 2009 the HomeLet Rental Index has reported a fall in rents on an annualised basis. The pace of rental price inflation across the UK has been slowing in recent months, having peaked at 4.7% last summer.

Of course whilst there will be concern and maybe some panic at the Bank of England that the £63 billion of the banking subsidy called the Term Funding Scheme has run out of puff. Meanwhile over at HM Treasury someone will be having a champagne breakfast as they slap themselves on the back for starting a rush to get rents in the official UK consumer inflation measure ( CPIH) last Autumn.

Fiscal policy

Back on the 23rd of May I looked at this.

Labour promised £75 billion a year in additional spending and £50 billion of additional taxes. The Liberal Democrats are also aiming for tens of billions of pounds in extra spending partially funded by more tax. Yesterday’s Conservative manifesto was much more, well, conservative………The Conservatives do not appear to have felt the need to spell out much detail. But they have left themselves room for manoeuvre.

Whoever wins we seem set for a period of higher taxation and higher expenditure but we remain in a situation where there is a lot of smoke blowing across the battlefield. There is of course also this from Labour.

we will establish a National Investment Bank that will bring in private capital finance to deliver £250 billion of lending power.


This has been an election where the economy has been out of the limelight. In a way this is summarised  by the fact that we have heard so little from the current Chancellor of the Exchequer Phillip Hammond. This means that many important matters get ignored such as the apparent devolution of so much economic power to the Bank of England. An issue which is important as in my opinion it was captured by the UK establishment and now pursues policies that politicians would be afraid to implement.

Other important issues such as problems with productivity and real wages which have bedevilled us in the credit crunch era get little debate or mention. To that list we can add the ongoing current account deficit.

Yet some markets are at simply extraordinary levels and it is hard not to raise a wry smile at the ten-year Gilt yield being a mere 0.99%! Whatever happened to pricing an election risk? It also provides quite a boost over time to the fiscal numbers as it is well below the rate of inflation.



18 thoughts on “The economics of the 2017 General Election

  1. This is spot on, you can vote in any party you like but you can’t change the economic policies or direction of them. As you pointed out yesterday the current direction is Japanese. The BoE is clearly above addressing the concerns of the electorate and I have no idea how long they will continue on the road to Japan before they realise that monetarism is a busted flush.

    The economy never recieved it’s bail out in 2008 and the rules are fairly simple. Spend the money into the economy then tax it out as required. This used to be called fiscal policy, it’s time we went back there.

    • So if the UK follows Japan’s path of insanity, doing the same thing over and over again and expecting a different outcome, it should have another 20 years to go before the people are crushed into utter poverty.

      Japan’s economy cannot be compared to the UK, it has a massive current account surplus, a currency so strong the BOJ has to try and weaken it, huge exporters and world class household name companies on the cutting edge of technology, the UK? a trade deficit of 3% of GDP, a basket case currency with a hundred year history of devaluations and defaults, our main economy?well we flip houses to one and other, so I don’t think it will take anything like 20 years for the UK economy to collapse.

        • I can’t but help think this is the reason the election was called, a crashing economy in 2018/19 would make the utterly incompetent Theresa May look far more incompetent than she has proven this last 6 weeks.

      • Kevin, quite so. I agree that the fake valuations are driven by monetarism. I don’t think a falling market is nearly as controllable as a rising one. The machine levers of the printing press will not necessarily come to the rescue of animal instincts for self protection. It seems the residential house price indexes are just showing a moderation. The next Govt may have to deal with “normalisation”. It could a Brexit Black Swan event.

        Paul C.

  2. I believe the economy is in a much more parlous state than the figures suggest and I believe that Carney himself indicated that we were dependent to some extent on “the kindness of strangers”, referring to the fact that we were running a huge BOP deficit whose counterpart was the willingness of foreigners to lend to us; a rare moment of frankness in a blizzard of obfuscation and self justification.

    The fact is we’ve become inured to what would not so many years ago be regarded as calamitous performance. We have a huge BOP deficit; a PSBR that is seemingly structural and shows no sign of being acknowledged as an issue let alone being addressed in any sensible way; productivity that is awful; growth that is insipid;real incomes going into reverse and major demographic problems that are starting to kick in and are no longer down the road a way.

    The remedy for all this is, as you say, the foot to the monetary pedal in order that we can keep the patient alive by spending money we don’t have on things we don’t need. What can go wrong is the slightest waft of the business cycle which will turn the whole thing down and a plethora of other economic and geopolitical issues abroad. Put it another way it means that things are not too good and the probability in my view is that they will get worse not better.

    May was right to call this election; when the fireworks start, which I think will be sooner rather than later, she wants a good majority to take her through the bad times. Whether it works remains to be seen.

    • “…. the foot to the monetary pedal in order that we can keep the patient alive…”

      eheheh, I posted this a while back

      ” Scientists have just confirmed that the green shoots of recovery are in fact just mold on the corpse…..”

      the trouble with keeping zombie banks and zombie economies alive is the issue that they are in fact quite dead, the spasmodic movement caused by the defibrillator is not a sign of “life”, what ever the “professionals” are saying…..

      below emergency interest rates

      more debt , Andrea True connection ” more, more more , how d’ya like it? ”

      Golgafrincham B’arkers the lot of them in HMG and BoE …..


    • May was keen to win while she can.I think-like you Bob-that we’re headed into a recession.

      At some point all the cheap loans will stop and we’re going to be stuffed.

  3. I do find the constant Tory attempts to belittle Labour’s fiscal plans by referencing a ‘magic money tree’ quite amusing. There is indeed a magic money tree in the form of the BoE’s balance sheet!

    • They’re all at it.The poverty of economic debate in Parliament is saddening.

      None of our so called representatives even vaguely question the things that are raised on here eg the real level of inflation.

  4. It was good to see the CoCo bond holders wiped out on the Bank Popular selling. For to long bond holders have thought of banks as risk free and that they will be rescued and their bonds safe. Pimco are probably in deep shock over losing €279 million on their bond position but it serves them right.

    • “…. losing €279 million on their bond position……”

      wow, thats just a glass of water compared to the Atlantic ocean out there…….


    • ‘It was good to see the CoCo bond holders wiped out on the Bank Popular selling’

      Absolutely,you get your coupon for running a risk.

  5. So much to discuss on this post,but quite where to start.

    I guess RBS’ payout sets the tone for our economy.A publicly owned bank,that has benefited from the generosity of taxpayers,not only directly,but via monetary policy/QE/HTB/FLS/TFS etc etc,takes some of the free profits from taxpayers and gives them to equity holders of the Goodwin era RBS.I for one think that money should have come from Fred and his honchos,not via the taxpayer back door.

    Our economy meanwhile teeters on the edge of a fiscal precipice that could well see sterling getting walloped in the near term,based as much as it is these days,on the the vicarious livings provided in the ponzi finance houses of the city.

    The choice isn’t great on the ballot paper,so I’ll be helping one of the smaller parties to keep their deposit

  6. Whichever way you look at it, we have been let down by the mainstream press, which seems so intent on backing one party or the other that there has not been a really serious evaluation of economic policy. For example, I do not think that I have once heard the following during the campaign:
    1. Anything about QE;
    2. The existence of a deficit right now. All the plans seem to be for this or that without acknowledging that there is already a deficit;
    3. People clearly enunciating the difference between debt and the deficit. I have heard multiple claims to the effect that debt will be lower at the end of this parliament than now. It seems to occur to no-one that this means that we would have to reverse the deficit and then go into surplus within five years.
    4. Higher interest rates for savers to rescue the pension industry
    5. The extraordinary fragility of the whole economy only working with interest rates utterly distorted by QE.
    6. Anyone challenge the concept of tax rises for high earners on the basis that 5% of earners already pay 47% of tax.
    It is as though such huge numbers are thrown around (QE of £445 billion, an investment fund of £250 billion, a bill from the EU of £100 billion) that we are just blanking it all out. Need another £20 billion for (fill in the blanks according to party) ? – sure. Build a million houses? -sure. Student fees too high? Scrap them.

    In my opinion, the damage done by the internet to the mainstream media is that it has removed almost all serious journalism through a combination of making papers uneconomical so the journalists are fired and of reducing the attention span of readers to the point where any old rubbish is believed.
    Thank goodness that you are still writing this blog to expose some of the nonsense!

    • Hi James and thank you

      As to the media I agree it is in a mess. I was looking for reports of the Lions rugby match earlier and went to the Guardian where the coverage included something of an online begging letter saying that a 19 year student was paying them money each month. There is also the issue of blatant partisan coverage which nearly everyone now indulges in. It is a great shame and in spite of the internet offering a treasure trove of information it is not easy to find leading to the Fake News epidemic.

      • Hi Shaun,

        I hope you are enjoying the Lions tour.

        You should have come out. The Lions supporters are having a great time.



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