July 2024
Market Commentary
UK Election
(3 min read)
The General Election here in the UK has come and gone without immediate drama and little volatility in the financial markets; the equity market is broadly unchanged, UK gilt yields have fallen slightly, but that was driven by weaker employment data in the US, and GBP has strengthened but, again, this was more to do with US dollar weakness. The result was very much in line with expectations although the make-up of Labour’s ‘landslide’ was perhaps less robust than the headlines suggested with Labour winning only 33% of the overall vote, with a low 60% turnout, and 50 of the seats having a majority of less than 1,000.
However, the question is what might this result mean for tax and spend and overall economic policy? The last time the Labour party came to power under Tony Blair, after a long period in the wilderness, the economic inheritance was good with the debt to GDP level at 36% compared with 97% today. There is very little wiggle room to spend on public services and there are several structural headwinds which have recently undermined economic growth. First, the demographics of an ageing baby boomer generation and a fall in the labour market participation rate due to sickness continues to put pressure on public services. As the chart below illustrates tax revenues and government spending are at historically high levels, albeit distorted by the GFC (Global Financial Crisis) in 2008 and more recently the pandemic and war in Ukraine. There is very little appetite for higher taxation to improve services which discourages investment domestically and from overseas. The real issue facing the UK economy is poor productivity.
While there remains some uncertainty on future tax policies such as harmonising income tax with capital gains tax, it is unlikely that the new government will change anything in the short term ahead of the Autumn Budget for fear of creating uncertainty and putting off the investment the economy needs. It is more likely that the new administration will focus on increasing the trend level of growth to increase tax receipts by improving infrastructure and planning (a solar farm built today cannot be linked to National Grid until 2036!). The cyclical upswing for economic growth is already in place and it is likely that the new Chancellor will want to support this using non fiscal tools with help from the Bank of England which is expected to cut interest rates from 5.25% to 4.0% over the next 12 months.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
July 2024
Read more Articles
Chart source: JP Morgan Guide to the Markets (June 2024)
