Both parties live in the shadow of Liz Truss’s mini-budget crisis so it’s perhaps no surprise that each are emphasising fiscal prudence and economic stability as the cornerstone of their campaigns.
After months of speculation about the timing of the next general election, UK Prime Minister Rishi Sunak recently confirmed a 4 July vote.
Current polls show that the opposition Labour party has a 20 point lead and betting markets put a 90% chance on its leader Keir Starmer being the next prime minister. While the Labour party winning the most seats does seem the most likely outcome, there are still challenges to overcome to secure a sizeable majority in parliament. Labour would need to win back the ‘red wall’ seats they lost in 2019 in the north of England and the Midlands, as well as seats they lost to the SNP in Scotland, while also winning seats they have never secured before.
Implications for the economy
Both parties live in the shadow of Liz Truss’s mini-budget crisis so it’s perhaps no surprise that each are emphasising fiscal prudence and economic stability as the cornerstone of their campaigns.
Both Labour and the Conservatives have committed to the primary fiscal target that is currently in play which stipulates that government debt must be falling as a percent of GDP by the fifth year of the forecast. Achieving this, even without any new tax or spending measures, looks challenging given the pressure on public services.
Moreover, both parties have already committed not to raise income tax, corporation tax or national insurance which severely limits any major spending pledges to back ambitions such as reducing NHS waiting times.
Labour has outlined a number of small tax measures it plans to implement including a crackdown on tax avoidance, VAT on private school education and additional measures for non-doms1 beyond what the Conservatives outlined in their 2024 Spring Budget. Labour’s shadow chancellor, Rachel Reeves, said that Labour has “no plans for wealth taxes” but this wording will no doubt be scrutinised when the manifesto is released.
Both parties are also presenting themselves as the party for business. While YouGov polls show that UK voters consider the Labour party as best placed to handle the economy, the Confederation of British Industry has voiced concerns about Labour’s New Deal for Working People, which aims to strengthen workers’ rights and introduce a ‘genuine living wage’. The UK’s most pressing economic problem, relative to our Western peers, is the dismal labour market participation rate and the stickiness of wage growth. Whether Labour’s policies will help resolve these issues is yet unclear.
Migration is also high on the list of electorate concerns and is another central feature of both campaigns. Labour announced that it will establish a Border Security Command to tackle illegal immigration, though the Conservatives have seen throughout their time in government how difficult it is to practically implement migration controls.
Green ambitions have been scaled back by both parties over the past year. Labour has significantly reduced the scope of its £28 billion a year Green Prosperity Plan and has shifted its attention to energy provision, with plans to set up a publicly owned energy company, GB Energy.
Brexit remains a contentious issue that neither party are choosing to focus on in any meaningful detail. Labour has said it will attempt to deepen UK-EU relations, with a ‘twin-track’ plan looking to first enhance defence and security, and then potentially greater alignment between UK and EU standards in certain areas.
However, the EU has been firm in preventing the UK from reaping the benefits of the single market without the responsibilities. Closer cooperation will likely necessitate the UK to concede some of its product and regulatory powers, which could yet be hard to present in the UK. We doubt any major shift in the relationship will happen quickly and a reversal of Brexit remains very unlikely in our view.
While there is unlikely to be any significant change in policy in the short term, Labour does still ideologically believe in a much greater role for government in the economy and has criticised, in particular, the Conservatives’ lack of investment in public infrastructure in the post-GFC era.
As discussed in our Long-term Capital Markets Assumptions, the UK is likely to follow other Western governments with a much higher rate of government investment spending than in the past. The hope is that such investment increases productivity and in turn pays for itself via higher future tax receipts. In the short term, a higher level of government financing may see more sustained upward pressure on longer-term interest rates than was experienced before the pandemic.
Implications for markets
Overall, with both parties acknowledging fiscal constraints, both parties competing in the political centre ground and the well-flagged potential for a change of leadership, there are unlikely to be any significant implications for markets when the vote is counted.
While there may not be large policy effects from a potential change in government, it is possible that household and business confidence increases if a shift to Labour is seen to bring a period of political stability. After all, the Conservatives may have been in power for 14 years but in that time they’ve had five prime ministers, as the baton has been continually passed back and forth between leaders from the more centrist group within the party, towards the more right-leaning backbench.
Such an improvement in consumer confidence could help support the UK’s nascent recovery which already appears underway as the cost-of-living crisis fades. Falling energy prices are leading to sizeable real wage gains and UK consumers are still sitting on large savings accumulated over the course of the pandemic. If the election result leads to the perception of a prolonged period of political stability, this could reduce consumer caution and help pave the way towards a more sustained recovery in domestic activity.
Greater confidence in the UK recovery could support UK equities which have been deeply unloved in recent years. The FTSE All-Share trades at a deep discount relative to the S&P 500. Although some of this benchmark divergence reflects the valuations of a handful of US tech stocks, even when we compare the discounts within sectors it demonstrates a pessimism about earnings prospects which in our view is not justified. If international investors do begin to reconsider the FTSE, the 4% dividend yield may further entice them.
When thinking about asset allocation ahead of the election, however, history reminds us that stock market returns are much more dependent on broader movements in the global economy than which party is in office. The FTSE 100 is made up of globally-orientated firms that derive 80% of sales from outside of the UK. Its performance was therefore particularly poor during global crises such as the bursting of the dot-com bubble and the GFC, periods in which Labour happened to be in power. When looking at FTSE 250 returns – where constituents are more domestically orientated – average returns have been broadly the same under both parties.