The size of the UK state
* While they disagree on many things, the UK’s Labour and Conservative parties seem to favour an expansion in the state – though to very differing degrees.
* Both are committed to increasing public expenditure, particularly on health and infrastructure. The Resolution Foundation estimated earlier this month that under either of the major parties UK public expenditure will increase by the end of the next Parliament to levels last seen persistently in the 1970s.
* According to the Resolution Foundation the Conservative’s plan would see spending rise from around 40.0% today to 41.3% of GDP by 2023-24. Under Labour’s far more ambitious plans spending would rise to 43.3% of GDP.
* This means a material expansion in the size of the state relative to pre-recessionary norms. In the 20 years to 2006-07 public expenditure accounted for 37.4% of GDP.
* The shift to a larger state is starting to happen. The new chancellor, Sajid Javid, has replaced his predecessor’s rules for controlling public spending and debt with less demanding ones. Earlier this month the chancellor ended to the freeze on working-age benefits introduced by George Osborne in 2016.
* In an inversion of the relationship of the last ten years private sector activity is slowing and government spending is accelerating. The annual pace of GDP growth slowed to 1.0% in the third quarter while growth in government expenditure accelerated to almost 4.0%, close to rates seen during the surge in public sector spending under the last Labour government almost 15 years ago. Public sector investment is currently rising even faster, at an annual rate of over 10%.
* Both major parties want to take advantage of the low cost of public sector borrowing to finance public infrastructure spending. This implies that the ratio of public sector debt to GDP, which has doubled since the financial crisis to around 80% of GDP, will stay higher for longer.
* But some of the planned increase in public spending is likely to come in the form of current spending – on salaries, services and benefits. Both parties appear to believe that current spending should be funded from tax revenues, not borrowing. Voters seem to have warmed to the idea of a larger state.
* An opinion poll commissioned for Deloitte’s latest State of the State report found that 58% of some 1,400 adults surveyed said they thought that government services should be extended, even if that means higher taxes. Just 13% of respondents favoured reducing public spending to finance tax cuts.
* Britain’s public finances, like those of many other rich countries, already faces headwinds from an ageing population and slower trend growth. Declaring an end to austerity is the easy part. A central task for governments through the 2020s will be to strike a balance between the size of the state, public borrowing and levels of taxation.
UK General Election: opinion polls and betting odds
Note: Probabilities derived from betting odds from bookmaker Smarkets at 17.00 on Friday.
* The average of the last five opinion polls show the Conservative Party with a 10-percentage-point lead over Labour. This has slightly decreased from an 11-percentage-point lead in the previous five polls.
* Betting odds imply a 93% probability of the Conservative Party winning the most seats in the general election.
* Betting markets now see the most likely outcome, with an implied probability of 62%, as a Conservative majority. This has increased from an implied probability of 43% last week.
* A hung parliament is assigned a probability of 36% by betting markets and a Labour majority 3%.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.1% at 7,303.
Economics and business
* UK GDP grew by 0.3% in the third quarter, up from a 0.2% contraction in the second quarter. Year-on-year growth stood at 1%, the slowest pace since 2010
* UK inflation slowed to a three-year low of 1.5% in October owing to the lower energy price cap
* UK retail sales fell unexpectedly by 0.1% in October from the previous month
* Little progress was apparent in reaching a “phase one” US-China trade deal other than China lifting a five-year ban on US poultry imports
* US President Donald Trump threatened to raise tariffs “very substantially” on Chinese goods if a deal is not agreed
* German GDP grew by 0.1% in the third quarter, narrowly avoiding recession after a 0.2% contraction in the second quarter
* Japanese GDP grew by 0.2% in the third quarter, the slowest pace in a year, owing to a drawdown of inventories in the run-up to an October sales tax hike
* The latest London Office Crane Survey by Deloitte Real Estate found that new office construction in the last six months is down by nearly a half, to the lowest level in five years
* The UK housing stock rose by 241,130 in the year to the end of March 2019, the fastest rate since 1987
* A leaked draft review recommends that the UK government proceed with the full High Speed 2 rail line from London to Leeds and Manchester despite cost overruns
* The FT reported that the UK is on course to miss many of its 2020 environmental targets, including those for reducing air and water pollution
* The International Energy Agency estimates that global carbon emissions will continue rising until 2040 and that fossil fuels will continue to account for almost 80% of energy demand
* Chinese industrial conglomerate Jingye agreed to buy British Steel, saving up to 4,000 jobs and planning to invest £1.2bn over the next decade
* Tesla CEO Elon Musk announced that the company’s first European factory would be built near Berlin, ruling out the UK due to Brexit uncertainty
* Google is considering offering current accounts in partnership with US banks
* German chancellor Angela Merkel said that the EU should develop a local platform to manage data to reduce reliance on US tech companies
* Chinese tech conglomerate Alibaba received approval from the Hong Kong stock exchange for a secondary listing of up to $15bn
* The FT reported that Saudi Arabia has reduced the size of its IPO in Saudi Armaco on weaker than expected investor interest
* US retailer Walmart increased its annual profit forecast, supported by growth in online and grocery shopping
Brexit and European politics
* Prime minister Boris Johnson said that his government would reduce immigration via a “points-based” immigration system that favours high-skilled workers
* Liberal Democrat leader Jo Swinson ruled out backing a government led by Mr Johnson or Labour party leader Jeremy Corbyn
* The Labour Party said that two cyber attacks hit its digital platforms
* Shadow chancellor John McDonnell announced that a Labour government would nationalise BT’s Openreach network and provide nationwide free fibre broadband, financed by £15bn in borrowing
* Brexit party leader Nigel Farage announced that his party will not contest seats held by the Conservative party, but refused to pull candidates from contesting Labour seats in pro-Brexit areas
* Following an inconclusive parliamentary election in Spain in which far-right party Vox more than doubled its seats, the ruling Socialist party agreed a minority coalition government with the left-wing Podemos party
And finally…in Russia a man got around Aeroflot’s pet weight limit by switching his cat for a lighter counterpart at check-in, but was penalised by the airline after posting about the incident on social media. Russian media asked president Vladimir Putin about the story; he said that the Kremlin does not comment about cats…cat in a spat