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What would a Labor government do about taxes and finance?
Rishi Sunak has called a general election for July 4th. But the ruling conservative party, which has been in power since 2010, is significantly behind in the polls. What do we know about the economic policies of Labour, the party now expected to take power?
“Against this backdrop, and in the absence of any major surprises, we do not expect the UK election to be a market-moving event,” said head of multi-asset at Royal London Asset Management, Trevor Greetham.
But changes in government are extremely significant for the economy and financial markets, not to mention the savers, investors and pensioners who depend on the clarity (or lack thereof) produced in Whitehall.
As such, each party’s manifesto will be analyzed by policy experts, lobbyists and savers in a search for signs of major updates to fiscal and monetary policies. Until we see the documents, it is difficult to make judgments about which party would be “best” for the UK economy, which has been in a state of low growth and high inflation since the pandemic, and is still dealing with the legacy of Brexit. .
What’s more, a long-standing obsession about taxpayer value and the impact of so-called mini budget it now means that manifesto “costs” are an important part of the UK political dialogue. There is every sense that such documents are as much a stick with which to defeat parties as they are a call to action or a vision for change.
The Labor Party says ‘We have changed’. Will this change anything?
When Rishi Sunak, who was previously responsible for the UK economy as chancellor, spoke on Wednesday, he immediately cited his record during the pandemic and argued that his Labor counterparts had “no plan” for growth.
Fortunately, this has occurred in a context of improving economic conditions: the UK has emerged from recession, inflation is at 2.3% instead of 11.1%, the job market is generally robust and the stock market is at record levels. Even the International Monetary Fund expects a recovery in growth in 2025.
Still, there are big political problems. Sunak is under pressure due to the UK’s tax burden, which is at its highest level since the Second World War. British public services are under great pressure. Mortgage rates are also at levels last seen during the 2008 financial crisis.
The Labor Party has been working on its response to this for a long time. Much of his approach has been informed by the perceived legacy of Jeremy Corbyn, but there is more to it than that. Long before Corbyn was leader, the Party occasionally struggled to present itself as “pro-business”. No wonder it has already published a plan for the City of London, itself a key “constituency” that has traditionally been seen as pro-Conservative.
The woman at the center of this effort is shadow chancellor Rachel Reeves, whose only major gaffe so far appears to have been an incident involving allegations that she plagiarized sections of a book she wrote about women economists.
A former Bank of England economist, Reeves suggested that corporation tax would be capped at the current rate of 25%, end chancellors’ ability to eliminate fiscal rules and promised not to re-impose a cap on bankers’ bonuses, an issue controversial. measure.
Introduced by the last Labor government as a populist measure after the global financial crisis, banks got around the bonus cap by increasing base pay. Dealing with the Labor Party’s own legacy here has been tricky, but ultimately it’s as much a question of optics as whether the party is actually uncomfortable with people earning large sums in Canary Wharf.
And then there’s the meeting room. Still dominated by men. Still looking for ways to contribute to the UK’s economic growth. And still under enormous regulatory pressure.
In the 2019 election, executives took a dim view of talk of wealth taxes and renationalization. And yet, since then, popular discourse has viewed such ideas a little more kindly. Right-wing media have always been keen to portray Jeremy Corbyn and his shadow chancellor, John McDonnell, as Marxist disruptors. Naturally, the financial sector did not like his ideas.
In 2024, however, I’ve heard about renationalizing Thames Water, and uneasiness (to say the least) about the payment of dividends to irresponsible bosses is a growing avenue of discussion. Labor may have more room to maneuver here than they realise.
Would a Labor government cut taxes?
But none of this is exactly comprehensive. In fact, we could go further and say that the Labor Party is still being deliberately vague. One of its few solid commitments has been the application of VAT to private school fees. You can’t build a government just based on that.
It has already suffered a backlash for diluting plans to spend £28 billion a year on green industry, but it maintains the idea of creating Great British Energy, a state-owned renewable energy company. Oil and gas companies are footing the bill and, like all European governments, Labor will have to tackle the climate change transition.
Enter Ed Miliband, himself no stranger to losing elections, who reprized his former role as Secretary of State for Energy and Climate Change (2008-2010) in the shadow cabinet. His current role is different, as shadow secretary of state for energy security and net-zero emissions, but the mandate is the province of a man whose “Ed-Stone” was the last gasp of the Labor Party’s failed re-election bid in 2015 .
In the personal finance space, although we may not see the “British ISA” promised by current chancellor Jeremy Hunt This year (or ever), the Labor Party will be keen not to dismantle the current savings and investment regime too quickly. Yet Rachel Reeves meddles with proposed policy on the taxation of pensions, savings products and financial advice, all of which need simplification.
The affordability of current state pensions is an issue that governments want to avoid talking about, but the problem will need to be understood. And conservatives know this. Jeremy Hunt has already said that a new Conservative government stay with the triple lock after the electionbut there is every feeling that this is just a political grenade to be thrown at any potential government of a different color.
And then there is the tax burden.
High levels of public debt mean that the next government will have very little room for maneuver to cut taxes. As the party of the NHS, the Labor Party is likely to find itself in a real dilemma regarding the funding of health services, which is still seen as a common issue in opinion polls.
On this, readers with long memories will remember all the discussions about Gordon Brown’s decision in 2002 to allocate 1% to National Security contributions to fund a £6 billion increase in NHS spending. Today, the NHS costs the state £180 billion, ambulances don’t arrive on time and GP appointments have to be fought through the 8am call queue. After gilt yields soared and the pound fell sharply during the “Trussononomy” After the mini-budget debacle, markets seem to be paying close attention to how tax increases are financed.
Pray for growth
With this peculiar and difficult set of circumstances, it is no wonder that Reeves is advocating a Labor government with economic growth at the center of attention.
Without better economic growth, she said in a recent talk, a Labor government would have to make “impossible” decisions on taxes and spending. This perhaps makes sense, but it may have angered economists who wanted the shadow chancellor to make a stronger case for stimulating the economy with government money.
All of this means that Reeves and Starmer may well act cautiously at first, but that assumes there is a program for radical change to emerge later. An alternative theory is that a Labor government won’t change much. After all, the British voter is now used to high taxes and, after the pandemic era of furlough and “helicopter money”, a fair amount of government intervention. More of the same may not be particularly controversial. Either way, both parties have been stealing each other’s ideas for years.
That aside, decent economic growth won’t hurt. But if it wants to do anything with the results, the Labor Party must first perform well. It’s time to see whether Keir Starmer’s determination to put “power before protest” will pay off at the polls.