11 June 2024

All change at Number 10?

With Labour widely tipped to take a parliamentary majority at the next election, Allen Simpson considers the potential economic impact of a Labour government.

Many of us invested in the UK markets have wondered what the upcoming general election might mean for our holdings – but with a polling lead of as much as 30% for the Labour opposition, many fund managers have already begun to assume a Labour win. If Keir Starmer gets the keys to Number 10 it seems unlikely that much would happen to the FTSE or the value of the pound that hasn’t already been priced in.  

Which gives us some spare time to ask a more interesting question – what would a Labour government actually do? Who are these people who seem to be gliding into power with an ease of a jumbo jet on a sunny day?

Incoming governments are shaped by three things; economic realities, political realities and moral instincts. Although manifestos and policy announcements get the headlines, it’s in these three that we can find the best guide to what a government could do. Two set the limits of action, one sets the shape of the ambition. 

If Labour win the next election, they will be taking power in parlous economic circumstances. You can choose your preferred piece of data to make the point – economic output per person in the UK is barely higher than it was before the financial crisis, productivity is markedly lower than our major industrial rivals, and the sheer cost of housing is sucking capital out of the productive economy in an ever-growing rate.

When Darren Jones sits down at his desk as Chief Secretary to the Treasury, he will be looking at the fiscal result of this low growth UK – a real question of how affordable our state is. We talk a great deal as a society about how we address the demographic timebomb of a generation settling into far longer retirements than they saved for. There are unfunded challenges elsewhere too. The current government’s forecasts assume they put fuel duty back up, but no one thinks that’s politically realistic. Where do we find the £15bn to fund the expected cost of that freeze by 2029? Nor do the forecasts reflect the approaching risk of mass failure in local government or in our universities, the combined costs of which could run well into the billions.

Questions of social fairness are likely to define the political project as much as social mobility. 

The point of this gloom-mongering is to say that regardless of who wins, there’s little room to spend. Even if a new government achieves the rare economic trick of expanding the economy through investment, much of that money will be needed to simply meet existing exposures. So there’s our first constraint. There is, to quote a famous note left by a previous Chief Secretary to the Treasury, no money.

What about the political constraints? One mid-May YouGov poll had a lead for Labour which could translate into a Conservative party on fewer than 15 MPs. Even if that seems dubious, the venerable polling expert John Curtice puts the chances of a Labour win at 99%. For years all roads in British politics led to Brexit. But today, while Labour have a higher percentage of remain voters than in 2019, the Leave vote has crumbled away from the Conservatives to Reform, to non-voting, and in many cases back to Labour.

Which means that Labour are faced with a route to a huge majority, but one that runs through many Brexit supporting communities across the country. It is unlikely that a Labour Government would be more likely than a Labour opposition to significantly revise our relationship with the EU, or pursue a materially different immigration policy. Nor for that matter should the Party’s defence of the pension triple lock be a surprise. And here we have our second constraint – the political realities of holding together a coalition of voters that delivers Bristol and London, but also gave them a 26% by-election swing in Brexit voting Blackpool South. There will be conflicts and compromises on the way, and that winning coalition may quickly feel less solid.

So what about the moral instincts of a Labour government? Or to put it another way, who is Keir Starmer? He is (as he occasionally mentions) the son of a toolmaker and a nurse who rose to become a knight. As a young lawyer Starmer travelled the Commonwealth litigating death penalty cases back to the UK to end capital punishment. He first came to public attention in the UK defending activists in the McLibel case against the fast food giant. His time as Director of Public Prosecutions  - subject to the inevitable political debate now - saw him move from private practice into less lucrative public service.

Here we find the moral core of the Starmer project that will help set the terms of their governing ambition. Questions of social fairness are likely to define the political project as much as social mobility. Both Starmer and his Shadow Chancellor Rachel Reeves are pro-industrial strategy, and believe in a role for the state in setting the economic agenda. Consumer protection and unlocking investment will be big, and to some degree conflicting, ideas. In some ways we should expect a government in the tradition of Clement Atlee (who Starmer perhaps most personally resembles) as much as the 1997-2010 government.

This is the context of ambitions and constraints in which to understand the five missions for government which the Labour Party published in 2023. In mercifully shortened form they are: growth, green energy, healthcare, safe streets, and opportunities for all.

The highest profile element of ‘opportunities for all’ seems likely to be a flagship ‘New Deal For Working People’ which includes the right for workers on zero hours contracts to ask for a contract that reflects the hours they work, a commitment to the living wage, and reversing the anti-strike legislation of the post 2010 governments.  Despite recent press chatter that this agenda has been watered down it remains a substantial increase in workers’ rights.

Regardless of who wins, the economic and political realities facing our government are stark.

For investors there is an ambition to reinvigorate London’s capital markets, including making it easier for institutional investors like our pension funds to invest in venture capital. Consumer protection will focus on financial inclusion issues like Buy Now Pay Later, but the Party appears largely comfortable with the current government’s proposals to soften regulations on capital market investment to, for example, allow companies to maintain greater control when they join the stock market, at the expense of investor power. It will be interesting to see how a Labour government balances these apparent contradictions of investor protection and cutting investment red tape.

Elsewhere we should watch for two cross cutting issues which are likely to prove just as important as the five missions.

Firstly, ‘securonomics’, which is Rachel Reeves’ response to the problem of our lack of economic resilience, which has been so palpable from the effect of external shocks like Ukraine, the pandemic and the conflict in Gaza. It will mean a greater focus on domestic industrial capacity, strategic investments in energy and a greater role for the state. Close Biden watchers will recognise what is in some ways quite a substantial break from the economic orthodoxy of recent decades where efficiency through slim supply chains has trumped the security of excess capacity and onshoring. 

And secondly, fixing public services. Labour’s view is that while a lack of investment has damaged services profoundly, a combination of increasing evidence that productivity is stagnant in the public sector and the economic realities faced by the UK mean that reform will be as much a part of the package as investment.

Labour are approaching a general election as the favourites for the first time in 19 years. Regardless of who wins, the economic and political realities facing our government are stark – it will be fascinating to see what voters make of the Starmer project’s ambition to push beyond those constraints.

Allen Simpson has been close to Labour Party policymaking in financial services and broader industrial strategy for nearly two decades. He has served in a number of government roles within the UK Parliament and civil service. He formerly ran Labour in the City, the membership group for Labour members in financial and professional services. Allen has twice been a parliamentary candidate, doubling the vote and moving the Labour Party from fourth to second in Maidstone and the Weald.
In 2024 he was appointed Deputy CEO of UKHospitality, the trade body for the £140bn hospitality sector. Allen regularly provides advice to the Shadow Cabinet, and contributed to the recent Anderson Review into Business Relations commissioned by the Shadow Business Secretary.

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