Prospects for the UK economy in the aftermath of the 2017 General Election

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham

“The dire predictions made by many economists about what would happen to the UK economy after the Brexit referendum result do not seem to have been realised so far. The economy has continued to grow at a respectable rate.”  


The main economic effect of the referendum result was the immediate, sharp depreciation of the pound, and this has largely been responsible for the upturn in inflation over the past year. The depreciation of the currency undoubtedly provided some stimulus to the economy; other reasons for the resilience of the economy include the actions taken by the Bank of England and buoyant consumer behaviour. Also the rapid replacement of David Cameron by Theresa May in July reduced the political uncertainties of the result.

How does the General Election result change this? It means there are now two major sources of additional uncertainty impinging upon economic decision making. There is the ongoing uncertainty about the outcome of the Brexit negotiations. We do not have a clue what is going to happen. So a firm which is considering investing in producing goods which will be exported to Europe does not know the terms on which it will be able to sell goods there and may not invest.

In addition, businesses in the UK do not know what the UK government will be in several years’ - or even a few months’ – time; there is a high chance of another General Election in the not too distant future, and this could give rise to a change in government and very different economic policies. This might also be expected to make firms more cautious about making major investment decisions.

The latest inflation figures, putting inflation at 2.9%, mean that with nominal wage growth of less than 2%, real incomes are being squeezed. There seems to be evidence of a slowdown in consumer spending. Together with a probable decline in investment spending, there is likely to be a marked slowdown in economic activity over the next few months.  

The slowdown in economic activity will mean lower tax receipts. Demands for higher public spending, particularly on health, education and social care, which were prominent in the election campaign, will probably intensify.

The government (and whichever government is in power will face this dilemma) will be forced to choose between increasing public expenditure and keeping a tight lid on it. If it does the latter, it will court considerable public unpopularity and probable electoral defeat. But if it does raise government spending significantly, it will have to finance it.

Assuming it wishes to balance the budget – and all major parties have committed to doing this – the government will have to raise taxation. And there is no painless way of doing this. For example, an increase in corporation tax may generate additional tax revenues. But it will mean that shareholders (and these include many pension funds) will suffer and investment will probably decline. Consider a business which is contemplating foreign direct investment in the UK. The uncertainties of the Brexit process, and hence access to the European single market, along with higher taxation would act as non-negligible deterrents.

Many of the UK’s economic problems are home-grown and have nothing to do with the EU. There is much we could do to improve our economic performance. For example, the current structure of property taxation - council tax, business rates and stamp duty on property transfers - is highly unsatisfactory. But in the next few years our governments will have most of their time and energies absorbed by the Brexit process and it is difficult to see many desirable reforms in other areas being carried out.  

So the next few years are likely to see sluggish economic growth, little improvement in living standards, and inadequate public sector spending. It is difficult to be optimistic.