The Prime Minister has announced that it is his working assumption that the next UK General Election will be held in the second half of 2024.
Given the predictions in Cebr’s Top Ten for Twenty Four released last week, this doesn’t surprise us.
This quick note summarises our best view on how electorally important economic variables might move over the coming year and hence affect the timing (and to a lesser extent the result) of the election.
The most widely cited academic papers point to disposable income and labour market conditions as the most important economic determinants of voting behaviour, although they also make clear that the leverage of these factors is limited.
Also apparently important is “the feelgood factor” which is a more subjective subject but presumably takes into account market and sentiment indicators.
A new study published this month supports the view that economic factors influence but do not determine election results, concluding: “the results validate the economic voting hypothesis in cycles adjacent to economic downturns: support for the governing political party is positively related to individual perceptions of own financial well-being”.
But an earlier study from the LSE shows that these effects take up to a year fully to feed through and then wear off, wearing off completely after five years.
The latest Cebr forecasts suggest that UK consumers’ spending in the current cycle will bottom out in Q1 2024 before rising slightly faster than the past trend rate in each subsequent quarter this year. It is just possible that the unusual timing of Christmas in 2023 might have meant that Q4 2023 was in fact the bottom of the consumer cycle.
We estimate that average weekly earnings by Q4 2024 will be up 4.2% on a year earlier compared with the consumer expenditure deflator up 2.9% over the same period. Although people will still be remortgaging at higher rates than those fixed during the period of ultra-low rates, we forecast that Bank of England base rates will be down by Q4 to 3.75% from the current 5.25%.
We expect employment to grow slightly during the year and unemployment, after edging up very slightly early in the year, to edge back down in the second half of the year.
There is also likely to be some scope for tax cuts in the 6 March Budget. Although our past analysis has suggested that corporate tax cuts do more good for the economy than personal tax cuts, it would be optimistic in the run-up to an election to expect a government to hand money to companies who don’t vote rather than to individuals who do.
Possibly more important for sentiment, we are forecasting that most financial markets and probably even the housing market will start to benefit from the combination of falling interest rates and a strengthening economy.
If we accept the LSE conclusion that voters take a little time to perceive the impact of an improving economy, these results suggest that it will be in the Prime Minister’s interest to delay the election as long as he can, possibly even until the winter.
However, with the government lagging the Labour Party by around 15% in the opinion polls, the same analysis does not imply an economic bounce on a scale sufficient to close the gap. Our working rule of thumb is that 1% extra disposable income might boost the government’s popularity by about 1.5 %. So our forecast 2-% rise in disposable incomes after tax cuts might boost the government’s vote by nearly 3% and cut the Labour lead by twice that.
A 6% reduction in the Labour lead might reduce the chances of a landslide but on its own would be unlikely to change the winner of the election.
Sam Miley is Managing Economist & Forecasting Lead at Cebr
