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The biggest challenge ahead for the new government....

We're talking about potentially losing huge sums of money....

On May 8th there will be a new government and it's very likely that it will be a coalition.  For an economist this actually helps because, despite the rhetoric, the substantive differences in macroeconomic policy between the political parties are minimal.  This means that after the election any disagreements are likely to be about the welfare, housing, education and health budgets rather than about how to manage the economy.

Which does not suggest, of course, that there are no challenges ahead for the UK.  Falling oil prices and deflation can represent a temporary boost to demand as prices fall, but equally lower oil prices reduce export revenues and this will particularly affect Scotland of course.  The strong value of Sterling is, in some senses, a measure of the strength of demand in the economy, but equally, while Sterling remains strong, it makes UK exports to the US and Europe, our two biggest export destinations, more expensive.

And this is the biggest challenge that the next government will face: creating real growth in the economy from an output, or business, perspective rather than simply further boosts on the demand side.  The mystery of the post-crisis recovery has been around why goods exports have failed to boost economic growth given the low value of Sterling compared to pre-crisis.  While our services trade is stronger, it is still not growing fast enough in an international context to maintain our top ranking as a service exporter - we expect Germany to have overtaken us by 2020.

Europe accounts for some 43% of the UK's goods exports and around 30% of that is dependent on EU membership according to the Centre for Economic Reform.  Based on that, Delta Economics estimates that leaving the EU would cost the UK over £400bn in lost export revenue by 2025.  

These are large sums of money and as we are only expecting UK trade growth to be around 0.7% annualised for the next five years, trade, and specifically trade with Europe, has to be a priority. 

 

 

 

 

 

Liveryman Rebecca Harding

Dr Harding is CEO of Delta Economics

http://www.deltaeconomics.com/