On the 18th April 2017, Theresa May called for a “snap election”, with the aim of shoring up her own Conservative support within the electorate, in order to allow her to move forward in Brexit negotiations without the hindrance of a high number of Labour seats within government. The Conservative’s original 20% security lead in the polls further gave May the necessary excuse to call this election. A Daily Mail headline quipped that she would be able to “Crush the Saboteurs,” referring to the pro-EU obstacle that Jeremy Corbyn and his party represented.
However, a poor Conservative campaign combined with a lacklustre set of policies, allowed a newly rejuvenated Jeremy Corbyn to target the young pro-EU demographic, ultimately steering Labour to take 12 seats from the Conservatives, and prompting a “hung Parliament” to develop.
A hung parliament screams uncertainty. During the last 12 months, British investor confidence has been shrouded by uncertainty. Uncertainty over whether or not Britain will vote to leave the EU. Uncertainty over whether or not Britain will actually trigger article 50. And now, uncertainty over whether or not Conservatives will be able to negotiate a successful Brexit, after losing their majority. This level of skepticism has meant that Britain has become the slowest growing economy of the G7 since Brexit.
This reduction in short-term growth can be explained by the reduction in investment, as a result of a fall in consumer and investor confidence. Theoretically (assuming ceteris paribus), a decrease in Investment (being a component of AD) will lower the rate of growth of AD, hence relative to other countries, British growth in RNO will be comparatively smaller, which is symbolic of a reduction in short term economic growth.
Within minutes of the exit poll being announced, Sterling value dropped by 2%. This can be explained as the election results represented one step closer to Downing Street for Jeremy Corbyn. Labours policy to increase corporation taxes from 19%-26%, would naturally deter many potential firms from moving their business to Britain, hence demand for the pound shifts inwards, and its price decreases.
These election results represented a growing sense of opposition within the general public against Conservative austerity. David Cameron’s policy of reducing the government debt by cutting government expenditure has taken its toll on the NHS. The public is therefore calling for an expansionary fiscal policy, in terms of increasing Government Spending, yet this represents a policy conflict with Cameron’s aim of reducing the budget deficit. Ultimately however, the disappointing growth results since Brexit call for both expansionary monetary and fiscal policy, in an attempt to kickstart the economy, even at the trade off cost of increased levels of inflation, and a worsening budget deficit.
If Keynes were here today, I think that he would argue that due to the poor levels of consumer and investor confidence (animal spirits), government expenditure can not be fully utilised, as the multiplier effect would have little effect if the economy’s propensity to withdraw was too great. Therefore, at the root of kickstarting the post-Brexit economy, is kickstarting British consumer and investor confidence in our own economic and political institutions. Unfortunately, the surprise result of the snap election has only acted to exacerbate the looming sense of uncertainty that clouds post-Brexit Britain.