Weekly update - Has the Labour Leopard changed its spots?

Now that the starting gun has been fired for the UK general election, I will be tuning into Question Time on BBC on Thursday evenings and will listen keenly to all that ITV’s Political Editor Robert Peston has to say in the run up to 4th July.  I will also listen to numerous podcasts and read tomes of political commentary.

Whilst I am highly cynical about politicians and have reservations around the UK political system, I find politics and the upcoming election fascinating.  

Its fair to say that since Tony Blair introduced “New Labour” in the 90s the Conservative and Labour parties look a lot more alike than they used to. The left is not as left as it used to be and the right is not as right as it used to be as the extremes are not electable. For many years this and other factors have left me wondering whether the winner of the UK election matters for the UK populace, the UK economy or UK equity markets.

At the time of writing, the detailed Conservative and Labour manifestos have not been released so we are mostly relying upon soundbites which include: -

Conservative Party

Labour Party

Reduce inflation

It’s time for change

Grow the economy

Office for value for money

Reduce National debt

Halve consultancy spending

We won’t raise taxes

We won’t raise taxes

Your pension is safe

Your pension is safe

Scrap Non-Dom Tax Breaks

Focus spending on permanent staff

Cuts to National Insurance

Covid Corruption Commissioner

Net zero 2050

Scrap Non-Dom Tax Breaks

Reduce immigration

Reduce immigration

Improve health service

Improve health service

Bring back National Services

VAT & rates on private education

Outlaw ‘Mickey Mouse’ degrees

Create Great British Energy Company

The bulk of promises/policy are entirely predictable and, as you can see, have a large degree of overlap. I would summarise them as (1) improve the economy (2) improve voters’ wealth (3) protect pensions (4) fix the health service (5) reduce immigration and (6) transition the UK economy to a more environmentally friendly place. While the routes that the Conservative and Labour parties plan to take to get to their end goals may be very different, if you take a step back it appears they want to get to very similar places.

Conservative Rishi’s (1) bring back national service/community service and (2) outlaw ‘Mickey Mouse’ degrees and redirect the cost towards apprenticeships appear to be directed at the elder voter and will likely alienate the youngest voters. Whether they appeal or not, I think most people will immediately dismiss them as gimmicks that would be nigh on impossible to implement.

Labour Keir’s create the Great British Energy Company (a publicly owned company that will provide clean energy) appears to have broad appeal. It is proposed the entity will be funded from the National Wealth fund, it won’t cause an increase in personal taxation, nor will it involve nationalisation of any part of the energy industry.  I can’t help but question the funding, the fact that public and private businesses will be in direct competition in the energy sector and whilst this isn’t nationalisation, I feel a little uncomfortable and wonder whether it’s a precursor to nationalisation.

The gap between political promises and delivery for many years has been huge and I would recommend that anyone heading to the polls takes election promises from any political party with a large pinch of salt as I am not convinced their track records are about to improve.

There are some inconvenient truths that both political parties must face including: -

  • Old Mother Hubbard says the cupboard is bare

Source: UK OBR data  

Source: OECD Data

The charts above show that since COVID arrived in 2020 the UK National Debt has ballooned 44% from £1,898.9Bn to £2,732.3Bn. At the same time the 10-year Gilt yield has risen from 0.9% to 4.1%. As the Government refinances the cheap debt in the system the debt servicing burden will balloon. If all debt were refinanced today using the current 10-year Gilt yield the implication is that over five years the annual debt servicing burden would have increased more than sixfold from £17.8Bn to £110.9Bn. In practice, UK Government debt matures over many years so the impact will not be as direct but it is clear that unless interest rates collapse, or the Government finds a way to repay substantial amounts of debt the debt servicing burden is heading higher and will reduce the Government’s ability to spend elsewhere. 

The chart below shows public sector tax receipts as a percentage of UK GDP. Over the same five-year period the tax take as a percentage of economic activity has risen from 36.9% to 40.3%, meaning the tax burden has increased by 9.3% over the period. This on its own is bad enough but when you add in the impact of inflation you quickly understand why there have been so many strikes and the rising cost-of-living gets so much coverage in the media. The average Brit has seen a substantial reduction in their spending power in recent years.

Source: UK OBR data

  • Demographics are very unhelpful

The chart below shows the ageing demographic in England and Wales. The number of people reaching retirement age is exceeding the number of people entering the workforce. This presents multiple problems including less economic activity, lower tax take, higher Government pension payments and an increased need for healthcare. None of this is helpful for Government finances. AI will help improve productivity within the economy, but it is hard to see how the UK can grow and thrive without substantial net immigration. The key will be embracing people who add economic value or deliver essential services for the economy.

When I consider matters, I don’t think the result of the UK General election will matter much for the UK populace or the UK economy. Raising taxes will be untenable with the populace and the Government don’t have the budget to do more, so, they will be limited to juggling their budget between deserving causes as whoever is in power will have their hands firmly tied by their purse strings.

As regards to UK equity markets they will be indifferent to the outcome until one party or the other does something that actively encourages UK pension funds to invest in their domestic market. Recent statistics have shown that UK pension funds now only own 4.2% of the UK equity market which compares to owning 45.7% of the UK equity market in 1997. There have been occasional whispers that something will be done to encourage UK pension funds to invest more in their domestic market but so far there is no firm commitment from either party.

Despite naturally leaning towards the right of the political spectrum I don’t think the 2024 election outcome matters. My only concern is if Labour has a landslide victory will they be emboldened and begin to look a bit more like old Labour? This leaves me asking “Has the Labour Leopard changed its spots?”

 

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