Global economy could do with slower UK austerity rate

QNB said today in its weekly report that the the slower rate of austerity applied by the Labour Party in the UK could be favorable for the global economy and financial markets.

QNB cited recent reports which states that smaller parties will gain more seats in the parliament during this elections. Additionally, the odds put the combined likelihood of a Conservative or Labour majority at only around 9%. This would most likely lead to a "a hung parliament," the report concluded.

On economic differences between the two leading parties in the UK, QNB said that "Labour would implement austerity at a slower pace than the Conservative party. Based on stated policies, this should lead to a slower pace of fiscal consolidation." The UK was running a fiscal deficit of 10.8% of GDP and public debt was 66% of GDP, QNB noted in its weekly report.

 The austerity programme had a significant impact on the British economy, shaving an estimated 2% off GDP growth in each of 2010 and 2011. QNB added in its report that austerity implies lower spending and higher taxes, which reduces aggregate demand, "creating a fiscal drag on growth." The report noted however that the blow resulting from austerity was softened by easy monetary policy through near-zero interest rates and multiple rounds of quantitative easing by the Bank of England (BoE).

The report acknowledged divergent views on fiscal policy are still taking centre stage in this year’s elections. All the main parties agree that further fiscal consolidation is needed but there are important differences on the pace of consolidation. "The Conservative party plans to target a 1% overall budget surplus by 2019/20 from a 4.1% deficit in 2014/15. Meanwhile, the Labor party plans an easier fiscal trajectory and intends to balance the current budget deficit (excluding investment spending) by 2017/18." The report concluded from its study that "The UK electorate appears to agree with the conclusions that fiscal austerity."