The Labour Party achieved a landslide majority in last week’s general election. This gives the new Prime Minister a strong mandate to deliver on his manifesto commitments. As one of his government’s top priorities, Sir Keir has set out his determination to improve economic growth, which has been lacklustre in recent years. This will require a focus on addressing weak productivity, labour shortages and UK trading relationships around the world, particularly with the European Union.
Focus on economic stability
It is unclear at this stage how bold the new government will be using their large majority to bring about significant reforms in respect of the UK economy. Liz Truss’s mini-Budget in 2022 caused market turmoil and clearly illustrated the limited headroom in respect of fiscal policy against a backdrop of high public debt and interest rates. Indeed, the new Chancellor, Rachel Reeves, has made it clear that she intends to respect fiscal rules in the interests of economic stability.
Challenges lie ahead
However, the challenges the Labour government faces should not be underestimated. Public sector debt is very high at around 97% of GDP, inflationary pressures remain in the UK economy with core inflation at 3.5%, and there is acute pressure on public services with significant cuts of £20bn or up to 3.5% baked into non-protected departments. In addition, the benefits bill to the taxpayer is enormous with nearly 3m adults in the UK of working age on long term sickness benefits and the state pension bill anticipated to rise significantly in the years ahead based on demographics and the ‘triple lock’ state pension escalation mechanism.
There is already a gap in the budget between anticipated tax receipts and spending; this budget shortfall will be even greater if Ms Reeves decides to reverse the planned cuts to certain public services or increase the budget for public services in other areas, such as health and education.
Potential tax increases in the autumn Budget
The new government is expected to hold a Budget in the autumn to set out its economic forecasts and its plan for the coming year. It could potentially seek to increase borrowing, but this would likely require a change to the fiscal rules it intends to respect and gilt supply is historically high, so the market may struggle to absorb more new gilts. In addition, or alternatively, significant tax rises are anticipated to cover the budget shortfall.
Some tax rises have already been set out, such as an intention to close tax loopholes on non-domiciled individuals in the UK, and to levy VAT on private school fees. These measures remain controversial in respect of the amount of additional tax revenue they may generate given the ability of wealthy individuals to re-locate to other countries and the extent to which parents may take their children out of private schools and bring them into the state education system at the taxpayer’s expense.
The Labour government has stated it will not increase the four taxes which generate the largest tax receipts for the government: Income tax, National insurance, VAT and Corporation tax. Nevertheless, the fact that tax thresholds remain frozen for the next 4 years will in itself generate more tax revenue as more taxpayers are brought into the tax system and increasing numbers of individuals become higher rate taxpayers.
There has been significant speculation that CGT and Inheritance tax (IHT) could be increased as they could be viewed as a tax on wealth, so not covered by the new government’s desire to support ‘working people’. CGT could potentially be increased, so as to align the tax rates more closely with income tax. In addition, the business asset disposal relief, which is a lower rate of CGT of 10% on the sale of a business could be restricted further or abolished.
Potentially less likely, is the introduction of a double charge to both CGT and IHT on death, which would impact individuals who have owned second homes and shares for some time where valuations have increased (at present, no CGT is charged on death, as the value of the asset is taxed to IHT).
In respect of IHT, the rate of tax could be increased and potentially thresholds adjusted to raise the tax take. Some reliefs could be reviewed or abolished – in particular, the IHT relief on tenanted farmland, or business assets.
Council tax bands may be reviewed and adjusted to increase the tax take from both second homeowners and owners of more expensive properties.
Summary
The new Labour government has significant political capital to reform the UK economy having won a landslide victory. Enormous challenges need to be overcome to get the UK economy on a growth path and narrow the productivity gap with other major economies, such as the US. This will not be easy and will require some radical policy-making, difficult decisions and determination to bring about change.
UK Stability
There may be a closer relationship with the EU, including in respect of defence and assistance to Ukraine. This could lead to trade agreements benefiting UK businesses in diverse sectors such as chemicals and energy. Better relations with other European countries is likely to improve the image of the UK in the eyes of the world promoting economic and market stability.
Ironically, after a decade of the UK being viewed as chaotic and unstable in comparison with the EU and the US, the situation could now reverse with a stable moderate UK government. In contrast, there is now political instability in France and other EU countries with the rise of far right and left populist parties; in the US, there is the possibility of Donald Trump, a convicted criminal, winning the presidential election in November. Given time, this potential for greater stability in the UK should encourage more foreign investment into the UK and boost UK economic growth.
UK investment opportunities
From an investment perspective, UK equities remain competitively priced in comparison with the US and other developed markets. If the new government succeeds with its agenda of attracting investment, reforming planning regulations and improving public services, working with both business leaders and union representatives, the sentiment for UK assets could improve significantly in the next few years.
Please note that our view on the general election is based on our understanding of the proposed policies and available information; we cannot be held responsible for any errors, and you should not act on the basis of the information in these articles, nor do they constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch via telephone at 01392 875500 or email at info@SeabrookClark.co.uk.