Notwithstanding the unreliability of the polls, a Labour Government with a working majority looks not unlikely come the General Election in July. Investors and clients are left scratching their heads, asking what action, if any, they could be taking. 

It is hard to know what to expect from a Labour Government, so reticent have they been about their policies. Rachel Reeves, the Shadow Chancellor of the Exchequer, pleads that she cannot be expected to formulate policy until she sees the books, but a stagnant economy, reduced labour force participation, declining tax revenues and rising public expenditure as a percentage of national income, or GDP, are all too plain to see. 

Correctly, the talk is all about growth, but there is little substantial policy behind its promotion beyond a potential tax on non-doms and VAT on private education. 
However, assuming Labour secure a working majority, a stable government that can prioritise economic progress will certainly be welcome.

Even if an incoming government did nothing (oh, happy day) - lowering inflation means that households should benefit in real terms from wage rises, i.e. consumption should rise. The Government of the day should also benefit from economic fortunes slowly returning to pre-pandemic levels. With the pace of inflation currently looking like slowing, this could usher in gradually lowering interest rates, which eases the flow of capital around the economy and, at the same time, reduces the burden of interest payments on the huge pile of State debt.

Notwithstanding this,  room for manoeuvre by a new Government is heavily limited by the level of the tax burden already imposed on a weakened economy – the current  36.5% of GDP now is at levels not seen since the aftermath of the Second World War. VAT on school fees is predicted to be tax neutral at best and, at worst, to layer yet more cost on the state education system. (Fee prepayment schemes, for so long unattractive, may enjoy a short-term boom this summer).

Hopefully, Ms Reeves will, unlike many previous Chancellors, resist the temptation to fiddle further with those two great long-term savings vehicles, SIPPs and ISAs. But in the face of depleted tax income and with the siren voices of Treasury apparatchiks forever whispering into Chancellors’ ears of theoretically ‘lost’ revenues from these tax-favoured structures - as if savers and investors would blithely carry on in the face of the removal of those tax benefits – nothing can be considered sacred. Taxing non-doms is probably the best way of scaring off ever-mobile capital, as are threats to tighten yet further the transparency rules on trusts. Similarly, noble talk of being the ‘national party of Business’ does not sit comfortably with increased worker rights and protections in what is – despite the welter of recent labour laws – a still remarkably open and flexible economy for employment. 

However, manifesto commitments are traded between parties almost daily, making it hard to tell the wood from the trees. 

Thirty years ago, Gordon Brown was ridiculed for his reference to “Post Neo-Classical Endogenous Growth Theory” – not least by Michael Heseltine, who attributed the line to the incoming Chancellor’s adviser, famously telling the Tory conference, “It’s not Brown’s, it’s Balls”.

Tribal politics aside, stability and predictability are the prerequisites for the long-term planning that personal and business investment requires. Meanwhile, markets will deal with whatever comes their way and sound investment discipline will prevail. 
 

Note: The views expressed in this piece views expressed are those of the author alone and do not necessarily represent the views of Church House Investments.

Previous articles in this series

Markets in a moment - April 2024

Markets in a moment - March 2024

Markets in a moment - February 2024

Markets in a moment - January 2024

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