Does the economic outlook hinge on who wins?

The fiscal rules proposed by the Conservative and Labour parties in their manifestos last week suggested that the latter could borrow an extra £130bn more than the Tories over the next five years if in power. Using the pre-financial crisis rule of thumb for the ‘fiscal multiplier’ suggests that GDP could be 0.6% higher on average over the next five years under a Labour government than under the Tories – or even more if estimates of the multiplier since the financial crisis are used.

That said, there are as variety of reasons to think that the economic outlook would not look too different whether the Tories or Labour were the largest party in parliament. Gilt yields could rise in response to significantly more borrowing, offsetting some of the latter’s direct boost to the economy. Meanwhile, the Lib Dems could be coalition partners for either party and would act as a moderating force. And if the output gap is as large as we think, then both parties would be able to meet their fiscal targets with minimal need for further austerity measures.