A Labour win would be a roll of the dice for the economy

▀ “It depends”, the classic economist's answer, is apt in assessing the economic outcome of a Labour government. Looser fiscal policy and shifting income from capital to labour could be GDP positive. But a loss of faith in Labour's commitment to Bank of England independence could offset those gains in a mix of lost confidence, spiking interest rates and currency depreciation . ▀ We attach a 20% probability to a general election being held within the next year. The Government's precarious parliamentary position leaves it vulnerable to rebellions, particularly in passing Brexit‐related legislation. But the Fixed‐term Parliaments Act makes it difficult to force a new election, even if the Government is complicit. ▀ In the event of an election in the near term, Labour would require a significant swing in support to gain a majority. Opinion polls show little evidence of this happening, so we put the chances of a majority Labour government at no more than 10%. But the odds of either a Labour‐led coalition or minority government are around 50%. ▀ The consequences of Labour's plans for sterling are ambiguous. A looser fiscal stance should prompt the MPC to tighten monetary policy more aggressively, boosting the pound. But the Party's approach to the Bank could have the opposite effect. A rise in gilt yields is a safer prediction. But with more than half of the gilt stock held by the public sector and “captive” buyers, the scope for a major sell‐off is limited. ▀ The experience of the EU referendum suggests that a Labour victory is unlikely to cause a sudden collapse in confidence. But the drag on profitability from Labour's policies and an activist approach to foreign takeovers could cut FDI inflows, which may be bad for productivity, though it would imply a more competitive pound. ▀ Our modelling suggests that a looser fiscal stance could boost the level of GDP by 2% above our baseline view after three years, if Labour sustains market confidence. But in a “bad” Labour scenario, with central bank independence compromised, the hit to confidence, market rates and sterling would offset the gains from looser fiscal policy.