A Focus on the UK

A Far-Reaching Election

The UK is on the brink of a potentially historic general election on Thursday.

Current polling data suggests a significant shift in the political landscape, with the Labour Party poised to secure a substantial majority.

According to Bloomberg's poll of polls, Labour is leading with 41% of the vote, the Conservatives lag on 20.1%, the Reform Party are on 15.9% and the Liberal Democrats follow with11.5%.

Overall, the upcoming election result is poised to bring significant changes to the political and economic landscape. The Labour Party's projected victory could lead to substantial shifts in economic policies, such as increased wealth taxes and investments in green initiatives to achieve net zero goals. On the other hand, the Conservative Party faces challenges, including potential leadership concerns and economic impacts if they lose power.

Let’s assume that a new Labour Government comes into power. It remains hard to see how the new government will act in respect of the detail behind the platitudes that have been trotted out to date by Labour leaders.

A look at the main points from the Mais Lecture that was delivered by prospective Chancellor Rachel Reeves on 19 March this year at the Bayes Business School in the City of London may give us some forward guidance. The content can be summarised as Growth through Stability. This will be delivered due to firstly Securenomics, confidence through business feeling sufficiently secure which will encourage business risk taking and secondly by Investment through Partnership with Business.

All sounds sensible and hard to argue with but it of course assumes that there is money and investment available both domestically and internationally. And what happens if growth is not achieved in say 12-18 months? The financial markets and investors are not famous for their patience and that could encourage less prudent behaviour.

For example, Jon Mawby, co-head of absolute and total return credit at Pictet, argues that the UK government borrowing costs curve will steepen after the election as investors price in higher risk for long term gilts. He thought the next government could “either increase taxes quite aggressively, which is not going to be good for the economy or issue a load more debt and do a Liz Truss and try and get the Bank of England (BoE) to monetise it”.

If the government opts for the latter option, the UK debt market could become a target for bond vigilantes. Mawby says “The UK market is smaller and much more prone to bond vigilante type runs, as we saw with Liz Truss. Even with rate cuts you could see instability in the back end of the yield curve.”

Figures out last week showed that UK debt as a share of UK GDP (the size of the UK economy) climbed to 99.8%, up 3.7% on the previous year. The UK’s debt has reached £2.7 trillion, the highest level since 1961.

Meanwhile, the independent IFS (Institute of Fiscal Studies) has issued a scathing indictment of the major political party manifestos yesterday, saying both the Conservatives and Labour had “singularly failed even to acknowledge some of the most important issues and choices to have faced us for a very long time”.

A survey of 14 top City economists surveyed all said that if elected, Labour would have to raise taxes beyond those already announced. Asked which specific tax Labour would be most likely to raise, 86% of economists said capital gains tax.

Other key points to note include:

Business confidence and investment could be impacted by political uncertainty and policy decisions post-election.

Recent GDP growth rates on the positive side suggest economic resilience, but the future outlook remains uncertain amid global economic trends.

The BoE decision to maintain interest rates, amidst concerns about public debt levels, also plays a significant role in shaping economic outcomes post-election. The BoE has maintained interest rates for the seventh consecutive meeting, with a possible rate cut anticipated in August. This decision comes in light of the UK's inflation rate dropping to 2% in May, the lowest since July 2021.

Labour's net zero plans might cost 'hundreds of billions', with proposed green investments facing scrutiny.

A ban on after-hours work emails by Labour could impact wages, potentially placing burdens on businesses.

The offshore oil industry's concerns about policy decisions from Rishi Sunak’s government and Labour could affect energy security.

Whoever wins the next election, the economy should continue to improve, increasing the Uk’s relative appeal to investors. The next government should do what it can to avoid messing that up.

Market reactions, including the performance of the Pound Sterling and investor sentiment, are likely to be influenced by political developments and policy decisions in the coming weeks. The Pound Sterling recently hit a 22-month high against the Euro before retreating and fell to a 5-week low against both the US Dollar and the Australian Dollar.

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