Last week as predicted, Labour became the new party in government, having enjoyed a landslide victory over the Conservatives. With a huge majority of 412 seats, the party certainly now has the mandate to effect significant change should they wish.
Keir Starma has now selected his new cabinet, with 22 Labour MPs taking key positions. Hopefully, the next few weeks will begin to bring clarity as to what the future may hold. In the meantime, I thought some commentary on the potential impact on markets, the economy, and taxation might be of interest.
Please note this bulletin is for general information purposes only and should not be considered personal financial advice. Investments carry risk and you may get back less than you invest. Past performance is not a guide to future performance and the value of investments may fall as well as rise.
What does a Labour government mean for markets and the economy?
The election results were emphatic but seemingly full of contradictions. Labour achieved one of the largest majorities ever, but with the lowest winning vote share, and it did so by promising change, while emphasising continuity. The contradiction that may seem most apparant to investors, is that UK investment markets remained largely unmoved, despite the political earthquake.
Even though UK stocks rallied on Friday morning, this had more to do with global factors than domestic politics. This is as expected - we know that investment markets are often unphased by changes of government. That is, unless that government does something especially radical or unexpected. Liz Truss and Kwasi Kwarteng's disastrous mini-budget will forever remain a standout example of this, and an unfortunate legacy for the short-lived Prime Minister.
This cautionary tale, still very much in recent memory, may be partly why Keir Starmer continues to emphasise there will be no drastic changes to taxation or fiscal spending. For now at least... The knock on effect of this, is that any economic upside from government spending is likely to be limited for the time being. Fortunately however, growth indicators in the UK are already trending up, and this will hopefully be Labour’s primary source of revenue to fund its new political initiatives, not significant tax hikes.
The new government have been vocal about the financial mess they're inheriting from the Conservatives, the dire state of the public purse, and the poor health of the UK economy. We can expect them to dine-out on this for quite some time. What new government wouldn’t? The Tories lambasted Gordon Brown and the outgoing Labour administration for years when they came to power in 2010, for the ‘mess’ they inherited. New Chancellor Rachel Reeves wasted no time this week in returning the favour. ‘We face the legacy of 14 years of chaos and economic irresponsibility’ she announced. Ouch.
But whilst treasury coffers may not be in the best of health, when it comes to the UK economy, the reality is that the UK is actually in reasonably good shape at present, especially considering the stress events we’ve suffered in the past five years. Since the inflation and interest rate spike hit in 2022, the UK economy has repeatedly showed itself to be much more resilient than many commentators expected. As the Bank of England began aggressively raising interest rates, it was seen as inevitable that the UK economy would falter, and that a major downturn lay ahead. This was the expected ‘hard landing’ - higher interest rates would stymie consumer spending, push up the cost of corporate borrowing, and send the economy into a tailspin.
But as UK business and consumers weathered the storm far better than expected, whispers of a potential ‘soft landing’ scenario emerged. Could the BOE really walk the tightrope, of raising rates just enough to bring inflation to heel, without crashing the economy, then ease out of them in time to avert the financial meltdown? Amazingly, to date, they have largely succeeded, albeit aided somewhat by other external factors. The inflation genie appears to be back in the bottle, and the UK suffered only a short technical recession before returning to growth, with the latter crisis having been averted without cutting interest rates.
As things stand today, inflation has now mostly settled down. Consumers and business have made it through the storm in better shape than anticipated, and rate cuts are now expected to be announced during the latter half of the year. Whilst it will take a little while for this to take effect, this has the potential to create more favourable financial conditions for individuals and businesses. It will also potentially provide the new government with a stable platform from which to begin it’s first term. It will be interesting to see how things play out, and as ever, nothing is guaranteed, but there are certainly plenty of reasons for optimism when it comes to the economic outlook.
Next Chancellor’s Budget
The main focus is now on Keir Starmer’s so-called ‘fiscal continuity’. Whilst the Prime Minister has been keen to emphasise the new Labour government’s centrist and pro-business credentials, the reality will become more apparent in the first Labour Chancellor’s budget.
Rachel Reeves has already spoken of ‘short-term political pain to fix Britain's foundations’, but said in her recent speech, that Labour will not use its large majority to renege on its tax promises. She asserted that this ‘includes our commitments to no increases in national insurance and the basic, higher or additional rates of income tax, or VAT’.
However, this still leaves them some room to manouvre. Just continuing the freeze on income tax rates is a stealth tax in itself, whilst capital gains tax, and inheritance tax, were both conspicuous by their absence.
