Labour landslide: To tax or not to tax, that is the question

Executive summary:

  • The Labour majority is secured and for the Conservative Party, their worst nightmare of coming third and not being the official opposition, has been avoided. 
  • Markets have long priced in a Labour victory. It is business as usual with Sterling and FTSE futures largely unmoved.
  • Starmer and his Chancellor, Rachel Reeves, have very limited room to move. While the UK outlook is beginning to improve, core inflation remains stubbornly high.
  • The Labour policy agenda to pensions and the investment landscape doesn’t appear manifestly different to the proposed direction under the Conservatives.
     

The UK Election ended in customary fashion for the British Prime Minister – stood in a regional community center in the early hours of the morning next to a man with a trash can on his head.

The leader of the Liberal Democrats, Sir Ed Davey ended his five-week Stag Do with a sky dive (I wish) and now he will have to return to the real world. For Keir Starmer, the business of heading to Buckingham Palace and forming a government awaits.

An expected result

In the end, Sunak managed to keep his seat. Many of his colleagues were unsuccessful and the UK media has been circling all morning to pick over the bones of numerous Portillo moments. 

The anticipated result of the election since its announcement, has been a nailed-on victory for Keir Starmer’s Labour Party. The interesting questions have surrounded how large a majority Labour would end-up having; how bad it would be for the Conservative Party – loss or humiliation; and whether Nigel Farage’s Reform Party would make any real advances.

At 6am BST, with many results left to be declared, the Labour majority is secured and for the Conservative Party, their worst nightmare of coming third and not being the official opposition, has been avoided. Perhaps the most dramatic result were the terrible performance of the SNP in Scotland and Reform UK, securing 4 seats and a significant share of the vote. Political polarisation remains and eyes turn to the 2nd round of the French election on Sunday.

Markets have long priced in a Labour victory and the results will be of little to surprise them this morning. It is business as usual with Sterling and FTSE futures largely unmoved.

Tax increases?

Starmer and his Chancellor, Rachel Reeves, have very limited room to move. While the UK outlook is beginning to improve, core inflation remains stubbornly high at 3.5%, delaying interest rate cuts by the Bank of England.

The Conservatives made a big point of Labour tax increases during the election, but the reality has always been that tax increases would be required to tackle the budget deficit and increase spending on many crumbling public services and infrastructure – the debate was where the tax increases would be aimed.

One interesting policy change that could emerge under the new government is the treatment of the financing gap and losses on quantitative easing (QE) bond sales. With the Bank of England estimating that the QE draw on public finances could exceed £100bn, a change to the treatment of QE losses could create substantial fiscal headroom. A topic expertly covered in a recent FT Article by Toby Nangle

Despite securing a large majority in 2019, the Conservatives have failed to deliver much in the way of policy change across the pensions, savings and investment landscape – lots of rhetoric but precious little action. 

In this area, the Labour policy agenda doesn’t appear manifestly different to the proposed direction of travel under the Conservatives. Debates around pension consolidation, encouragement of UK investment, and continued review of the LGPS will remain on the agenda with greater scope for resolution under this administration. 

Our recent Global Market Outlook, described the attractive valuations of both UK gilts and UK equities and the beginnings of a more favorable cyclical backdrop. A period of political stability and more considered government, combined with some global tail winds could give Starmer an easier introduction to his time as Prime Minister.

The bottom line

The focus now turns to Rachel Reeve’s policy priorities. There are concerns around potential changes to capital gains tax, with Gilt markets looking for credible projections on debt and deficits that are costed by the Office for Budget Responsibility. 

There will also be interest in how the government deals with the Bank of England’s losses from QE. Other watchpoints will be policies on infrastructure and energy, the green transition, and the potential nationalization of rail and water companies. 

Investors are likely to allow the new government a period of grace. Signs of stability and credibility will generate a positive reaction from markets, but misjudgements and poor communication could be penalized heavily.

In light of these changes, pension trustees should consider their investment strategy and support members with their retirement planning.