A Labour of love: What does the UK General Election mean for you?

A Labour of love

Keir Starmer and the Labour party are being handed the keys to 10 Downing Street, as had been widely expected.

The market reaction tells you that investors were seeing this election as a non-event. Both major parties stuck to fairly central political ground, and the wide and consistent margin in opinion polls meant that there was little uncertainty around the event.

But what now? The Labour government is inheriting a UK economy that has fallen short of expectations for more than a decade, and their ability to spend is being constrained by an ever-growing debt load.

The party’s “pro-growth, pro-business” manifesto laid out plans to restore growth to the UK economy over the next political term. However, with Labour ruling out changes to the major tax rates (income tax, National Insurance, VAT, corporation tax), their scope to boost growth with public spending looks limited. Living in the shadow of 2022’s mini budget saga, Labour will be all-too aware of the potential implications of “unfunded” spending plans.

With the fragile state of public finances in mind, incoming Prime Minister Keir Starmer and Chancellor-in-waiting Rachel Reeves stuck to a prudent fiscal message in the lead up to the elections. Their manifesto implied a modest £9bn increase in spending (funded largely by closing “tax loopholes”), which pales in comparison to the UK’s more than £3trn economy. While we likely won’t get the full details on their plans for taxation and spending before the Autumn budget, we do think that Labour will enter a period of fiscal consolidation (roughly equivalent to 0.5% of GDP next year). That could be a moderate drag on the UK economy over the near-term at least.

In terms of what we do know, here's a rundown on the policy changes that stood out to us in the manifesto:

• Tax on Carried Interest – Labour plans to adjust the laws around taxation on carried interest for Private Equity principals. That would impact roughly 3,000 people in the UK and is expected to raise almost £550mn per year for the government.

• Changes to the non-dom regime – After the Conservatives ended the UK resident, non-domiciled regime at the Spring budget, Labour has hinted at further tweaks to the initial plans. For example, any non-doms with offshore trusts will potentially now see those assets subject to inheritance tax. Other tweaks, such as the removal of the transitional-relief for foreign income, have also been discussed.

• Energy Profits Levy – Plans to raise around £6bn by increasing and extending “windfall” taxes on oil and gas companies.

• Green Prosperity Plan – Labour wants a push on green investment. They intend to increase spending on renewable energy by 60% (costing almost £5bn per year).

• Planning reforms – A core piece of Labour’s growth plans. With little room for public spending, the party is looking to attract private capital with planning reforms to reinvigorate the economy. For example, removing planning barriers for new datacentres seeks to accelerate growth within the UK’s artificial intelligence sector, and regulatory changes will be aimed at encouraging innovation.

• International trade – Brexit is still a contentious issue in Westminster. Labour has ruled out rejoining the EU single market, but has committed to improving trade relationships to shore up the UK’s supply chain.

Those policies look to strike the balance between fiscal responsibility and a push for economic growth. That is no easy feat with the state of public finances today, and the magnitude of this Labour majority might pose risks of a drift leftward over the course of the political term. That risk does feel limited to us though, given that Labour’s share of the total votes isn’t quite as flattering as their number of seats. They will be conscious of the risk that poses to eat into their majority over the next term if they do not stick to the fiscal rules.

More details will come at the next Budget (likely in October or November), but for now a Labour majority brings some much needed stability to the UK political landscape at a time of heightened global uncertainty. It might feel strange to speak about the UK in such terms, but it does look to be a port in 2024’s political storm.

That gives us more confidence that the UK could be a more attractive destination for individuals, businesses and investments in the coming years.

Cuts are coming home

The UK economy is in solid shape heading into the second half of the year. Growth might not be incredibly strong, but 2023’s technical recession is behind us. Almost everyone that wants a job today has one, workers are getting paid more, and inflation has been on a downward path.

In our eyes, the change in political power in the UK will not substantially impact that economic picture over the near-term. More stability could provide some support for the pound, which we expect to be supported by elevated carry and an improving global growth backdrop over the next year. However, the primary driver for markets over the coming months is still likely to be the path of inflation and interest rates.

To that end, with inflation falling back in line with the 2% target (albeit with sticky services prices under the hood), the Bank of England hinted at its intention to lower policy rates at their August meeting. We expect an August cut to kick off a quarterly pace of rate reductions from the BoE to a terminal rate below the 4% mark. The risks to that view look skewed towards a faster cutting cycle in our view, particularly given the likelihood of tighter fiscal policy.

That means that today’s cash rates above 5% probably won’t last much longer. Markets don’t look to be fully appreciating the likelihood of Bank of England cuts, and we think that creates an opportunity to lock in yields for longer in UK fixed income markets – starting at the front-end, which tends to be more sensitive to central bank policy rates.

Not only that, but there is an added benefit for UK resident taxpayers when they purchase UK government bonds (or Gilts). That is because they benefit from an exemption on capital gains tax, meaning that only the “coupon” is subject to taxation.

When bonds are issued, they agree to pay a coupon reflective of the interest rate environment at that point in time. Up until a few years ago, many of these bonds were issued with very low coupons. Therefore, as interest rates have moved higher in recent years, investors have opted for bonds that can pay them a higher income. In turn, that has pushed the price of the low coupon bonds down. That means that more of the yield that you receive on UK Gilts today is realised through a capital gain at maturity, rather than the income component via coupon payments.