For many, the five weeks of electioneering in the lead up to the ballot was anything but exciting, with very little debate about policies being aired. But when it comes to politics, excitement is not always a positive. To that end, I would like to take a few seconds to pause and be grateful for the resilience of our democracy and the seamless transition of power to the new administration…. So, gratitude duly offered, and in the certain knowledge that Labour achieved an outright majority of parliamentary seats, I thought I’d take a closer look at the numbers behind the outcome. They reveal some very interesting and thought provoking aspects, as well as offering some insights into what it means to be a modern democracy. Therefore, do indulge me whist I reflect on the statistics behind it all. And please, stay with me – I promise to focus on the patterns behind the result, rather than get lost in numbers and details. Fear not, no mathematical formulae appear in what follows!
Politics isn’t just about winning votes
Labour’s significant majority was achieved with just under 34% of the share of votes. Given that the overall turnout was 60%, which is not a high number, this means only 20% of those eligible to vote did so in favour of Labour. That’s only 1 in 5 of us that voted for the government that now oversees our lives –a government whose stated aim is to bring about significant changes in terms of public policy and constitutional reform. Moreover, staring at the electoral map of the UK and the different colours that represent the various parties it’s obvious that the country is far from united.
The relationship between the share of votes received by each party and the parliamentary representation it affords them is noteworthy. Take, for example, the Liberal Democrats. Ed Davey’s party won 72 seats, resulting from 3.5m votes. Contrast this to Reform UK, who won only 5 seats from 4.1m votes, or to the Green Party who won only 4 seats from 1.9m votes. The Electoral Reform Society claimed it was “the most disproportional [result] in British electoral history”, noting that this election has seen the biggest difference ever between how we, the public voted and the MPs that now represent us. Given this, we can expect there to be much debate ahead about electoral reform (with a small r!). This is likely to include changes to the boundaries of the voting constituencies, amid questions over the dominance of specific party representation in some regions of the UK, as well as the resurrection of discussions about the merits of proportional representation.
Investment markets
So, what now for investment markets and the UK in particular? Well, much of the outcome of the election was already well priced in. There is a pattern that follows election results, one of broadly positive market returns and a sense of greater stability, and this pattern seems so far to be holding true. Markets can, for now at least, have more confidence in the stability of the political and societal direction. However, in the run up to the election there was a distinct lack of discussion about major policy issues and very little, if any, cross party debate. We know some things about the general intention and direction of our new government, but we haven’t heard much in the way of implementation. Therefore, whilst we know some, and not all, of their objectives, we don’t know how the government plans to achieve its aims, or how it will fund its agenda. This makes it more difficult to predict the longer-term impact on the UK market. However, we can reflect on the policy initiatives that have been signalled already, and dare to speculate on what might yet be revealed.
Policies versus actions
A pensions review is to be conducted; Labour had stated this and a Pension Schemes Bill has since been confirmed in the King’s Speech. The review will likely focus on pensions simplification and ‘intergenerational fairness’, although the triple lock will stay, for now at least. Increasing default saving amounts under auto-enrolment is likely to be considered, and we may well see the reduction (and redistribution into other government spending budgets) of some of the tax allowances for higher earners.
The pension review will also likely consider how to further embed the Mansion House Compact (which is currently voluntary) into legislation. This could see mandates requiring pension schemes, most likely Local Government Pension Schemes, to invest into UK domiciled assets and domestic levelling-up projects (or rather, to support the agendas of devolved city mayoralties, now that the levelling-up department of government has been repurposed for this). Such centralised control over pension fund capital could support Labour’s goals for UK economic growth and infrastructure investment, and it was also part of the direction of travel under the previous Conservative administration. However, it isn’t clear why pension schemes (or individuals) would wish to comply rather than seek out the global opportunity set of investment potential. After all, if you are looking to invest in, for example, private equity projects, would you prefer to look to the technology hub that is the west coast of America and the developing nations of Africa, where growth rates are currently some of the highest in the world, or constrain your investment horizons to Britain? I know where I would be inclined to look first, and I mean no offence whatsoever to the amazing island that I call home! The reality is that the strength of the UK economy to date has laid elsewhere, much of it in our service sectors.
The economic ambitions of Labour are dependent on domestic growth and, failing that, the harsh reality of the need to increase taxes (above their already high levels) to support government spending will need to be faced. The desire to underpin an economic resurgence could also result in a need to increase unfunded government spending (and therefore greater gilt issuance) to kick start projects….and when reading that last sentence some readers may well be put in mind of Liz Truss and Kwasi Kwarteng, and well you might be, because such a policy is, in the round, not that far away from the approach they tried, and we all recall the catastrophic impact that had on the UK debt markets. Notably, an increase in (unfunded) government spending would raise gilt supply, putting upward pressure on yields, which could increase the cost of servicing the national debt and, in turn, suggests taxes may rise further to help meet the interest payments.
An increased cost of financing would further drag on economic growth and constrain capital investment. Higher rates for longer might be good news for pension fund liability values, those individuals still wishing to purchase an annuity, and pension schemes seeking to secure benefits with an insurance company, but they are not positive for increasing our international competitiveness. And of course, one of the perennial challenges faced by the UK, that of low worker productivity, needs to be tackled successfully for strong growth to become embedded and accelerate….but we have yet to hear much, if anything, about a plan to do this. Effective labour market reforms that support industry and the public sector will need to accompany capital investment if the government is to achieve its policy objectives. Effective labour markets will also be an important contributor to maintaining inflation at target levels, which is necessary for the UK to be viewed as financially stable.
Housing, infrastructure and harnessing the wealth of a nation
House building and green infrastructure are sectors that Labour promises to re-energise, likely introducing changes to planning laws that will sweep away the administrative hurdles that prevent projects from moving forward. Labour has set a clear goal of building a minimum of 1.5m new homes over the next five years. Looking at what’s been achieved in terms of new builds in the past, under both successive red and blue administrations, both nationally and within regional mayoralties, Labour’s house building promise is going to be very difficult to deliver indeed. So, what could possibly make for a positive outcome in our housing sector this time round? Labour has said it plans to increase the number of local council planning officers, strengthen council planning departments, and require property developers to build more affordable homes. On the face of it, these all sound like reasonable first steps, but insufficient in themselves to achieve the desired aim. We’ve just seen at least one notable UK housebuilder downrating their expected build rate over the next two years. Every day that passes before new build projects can get up and running will only compound the challenge of reaching the 1.5m target by 2029.
There is much that has been said about the new UK [strategic development] Sovereign Wealth Fund (SWF), which will have a mandate to invest in UK based venture capital and technology related projects. The new UK Chancellor has directed £7.3bn of taxpayer money to establish the fund, and aims to ‘crowd-in’ significantly higher amounts of private investment by offering the opportunity to partake in the green energy transition and other projects. Expect pressing of the opportunity on pension funds, and thereby furthering the Mansion House agenda. SWF’s of much greater size have been successful in other countries, but the seed capital there has come either from significant revenue achieved from the sale of abundant natural resources, or from effectively taxing the private wealth of the citizens. The key questions for the UK Chancellor are: will the additional funding be forthcoming, will the SWF be effective at deploying capital into the projects the country needs, and will it generate the returns investors demand? It’s worth noting that whilst we still have significant reserves of oil and shale gas, the Labour party’s environmental policies preclude them from extracting and monetarising them. And raising taxes on ‘working people’ has already been ruled out by our new PM. So, if insufficient private investment arrives, another route might be needed.
It has been suggested, within previous Labour party publications, that the SWF be funded via a windfall tax placed on oil and gas companies, or on companies whose share price performed well during the COVID period. If effected, both of these revenue raisers would be expected to impact the share prices of the companies affected. Another method put forward to fund the SWF, which is becoming a recurring theme in this article, is issuing more government borrowing. However, at current interest rates, this option is not very attractive. There was also a suggestion within Labour briefing documents of selling down the UK’s remaining gold reserve – and thereby effectively finishing off the job that former Chancellor Gordon Brown started in 1999.
Final thoughts
In writing the above paragraphs, I’m put in mind of a quote from a former US President, who was, it is safe to say, sceptical of interventionist methods. He said, ‘the nine most terrifying words in the English language are these: I’m from the government, and I’m here to help’.
In summary, there is much to be optimistic about, and many of us are hoping that the change that has been promised will start to come through. Whilst we wait for evidence of the green shoots I shall leave you with this thought: As Antoine de Saint-Exupéry expressed so well, “A goal without a plan is just a wish”. Admittedly it is early days, and unless I missed it, we haven’t seen much in the way of a plan as yet. Let’s hope we have sight of more details in the near future….I suppose a Gantt chart would be too much to ask for?….
Paul Francis
Principal Investment Consultant
Quantum Advisory