“‘The City’ Backing Labour”
So said a Daily Telegraph headline this week. Polled by Bloomberg, apparently two-thirds of investment managers believe that a Labour government or a Labour-led coalition, would be best for the future of the economy.
This week it certainly feels as though the 2024 election starting gun has been fired. Rishi Sunak postponing (or attempting to: this may yet end up being contested in the courts given various of the targets he is shifting are legally binding) carbon-net zero delivery targets has put some blue water between the Conservatives and other parties as the Tories try to capitalise on the recent ‘success’ of defending Boris Johnson’s old seat in Uxbridge where voters rebelled against the London Mayor’s ULEZ expansion programme.
But back to Labour: it is true that Keir Starmer and his shadow Chancellor, Rachel Reeves, have been on a charm offensive with business. Arguably this is to put as much distance as possible between Labour 2024 and neo-Marxist Labour 2019 under Jeremy Corbyn, his Shadow Chancellor John MacDonnell and his former Shadow Secretary of State for Exiting the European Union, one Sir Keir Starmer, as it is to demonstrate their new-found love of business and to establish their economic competence compared with the Tories. In 2019 Rachel Reeves was chair of Labour’s Business, Energy and Industrial Strategy Committee, not part of Corbyn’s shadow cabinet but directly responsible to it.
This week it certainly feels as though the 2024 election starting gun has been fired. Rishi Sunak postponing (or attempting to: this may yet end up being contested in the courts given various of the targets he is shifting are legally binding) carbon-net zero delivery targets has put some blue water between the Conservatives and other parties as the Tories try to capitalise on the recent ‘success’ of defending Boris Johnson’s old seat in Uxbridge where voters rebelled against the London Mayor’s ULEZ expansion programme.
But back to Labour: it is true that Keir Starmer and his shadow Chancellor, Rachel Reeves, have been on a charm offensive with business. Arguably this is to put as much distance as possible between Labour 2024 and neo-Marxist Labour 2019 under Jeremy Corbyn, his Shadow Chancellor John MacDonnell and his former Shadow Secretary of State for Exiting the European Union, one Sir Keir Starmer, as it is to demonstrate their new-found love of business and to establish their economic competence compared with the Tories. In 2019 Rachel Reeves was chair of Labour’s Business, Energy and Industrial Strategy Committee, not part of Corbyn’s shadow cabinet but directly responsible to it.
Flying kites and throwing bones to dogs
But fifteen months away from the election (assuming that with an enduring 20pts deficit in the polls Sunak does not call a surprise bang-or-bust snap election), we would suggest that very little can be taken at face value at this stage to be able with certainty to form such an opinion. Labour is still at that early stage in the electoral cycle of flying kites and throwing bones to dogs.
Appealing to business and The City that Labour will be fiscally prudent and attempting to dispel fears of traditional left-wing tax-and-spend, Reeves has promised to be prudent on government expenditure and tax rates, indicating that there will be no wealth taxes and no changes to the marginal rates of income tax, capital gains tax (CGT) or inheritance tax (IHT). This is not to say that there will not be changes to thresholds or lifetime allowances, or the potential introduction of one for CGT. Labour’s Deputy Leader and would-be Deputy Prime Minister, Angela Rayner (to whose discredit, her very public outburst including the inextricably linked epithets of “Tory” and “scum” are indelibly imprinted on the memories of Conservative voters however much she apologised afterwards), consistently refuses to be drawn that changes to the tax regime have been ruled out, either before or after the election.
Further, throwing raw red meat to the recent Trades Union Conference (the TUC is still Labour’s major source of party political funding), ‘Angry Ange’ had no hesitation announcing significant plans for the expansion of unionism and the repeal of much of today’s legislation regulating the limitations of industrial action. Whatever happens to taxation, a significant change to employment law which encourages industrial disruption and by implication risks greater frictional costs to labour is hardly consistent with being business friendly or enticing and being attractive to overseas investors.
Appealing to business and The City that Labour will be fiscally prudent and attempting to dispel fears of traditional left-wing tax-and-spend, Reeves has promised to be prudent on government expenditure and tax rates, indicating that there will be no wealth taxes and no changes to the marginal rates of income tax, capital gains tax (CGT) or inheritance tax (IHT). This is not to say that there will not be changes to thresholds or lifetime allowances, or the potential introduction of one for CGT. Labour’s Deputy Leader and would-be Deputy Prime Minister, Angela Rayner (to whose discredit, her very public outburst including the inextricably linked epithets of “Tory” and “scum” are indelibly imprinted on the memories of Conservative voters however much she apologised afterwards), consistently refuses to be drawn that changes to the tax regime have been ruled out, either before or after the election.
Further, throwing raw red meat to the recent Trades Union Conference (the TUC is still Labour’s major source of party political funding), ‘Angry Ange’ had no hesitation announcing significant plans for the expansion of unionism and the repeal of much of today’s legislation regulating the limitations of industrial action. Whatever happens to taxation, a significant change to employment law which encourages industrial disruption and by implication risks greater frictional costs to labour is hardly consistent with being business friendly or enticing and being attractive to overseas investors.
Brexit semantics
Our future relationship with the EU is safer ground for Business and The City. Neither has lost its enthusiasm for and preoccupation with close ties with the EU (Brexiteers were a rare breed in such company, and, excusing the pun, remain so). But here too, Labour is offering mixed messages: throwing more bones. To the Red Wall constituencies which switched in droves from Labour to Tory behind Boris’s simple mantra of “Get Brexit done!”, the ones Starmer desperately needs to be able to command a decent majority, he has reversed his entrenched, conviction position of only four years ago when ‘Shadow Minister for the Prevention of Brexit’ (“Brexit can be stopped”) to one of promising not to take the UK back into the European Union.
However, he has pledged this week to re-negotiate the Brexit settlement agreement with Brussels; halfway through the period before it is eligible for review, both the UK and the EU are feeling much more comfortable with the arrangement, for all the enduring deficiencies and anomalies within the Windsor Accord and the unsatisfactory hotch-potch deal brokered for Northern Ireland. A substantial re-negotiation merely says to Brussels that the UK is open to giving significant concessions; in return for what? An inkling is the plan (and this is not new) floated this week by the foreign ministers of France and Germany of a multi-layered EU: the UK might be eligible for “Tier 3” status: given access to the Single Market and the Customs Union with all the obligations as well as potential benefits; with not being bound to join the Euro, but the price for all this would be a financial ‘contribution’ to the EU central budget, no access to the Common Agricultural Policy and, critically for trade, capital and people, UK courts being fully subsidiary to the superiority of the ECJ, and the UK having zero direct representation in Brussels and not participating in EU elections to the European Parliament. The EU would have us trussed up in its rules in return for mutual market access, but without the hassle of having the UK at the table in negotiations determining EU policy (incidentally, under current terms, membership of the Customs Union would preclude the UK signing any further trade agreements with other countries). Is that really progress for The City and business?
However, he has pledged this week to re-negotiate the Brexit settlement agreement with Brussels; halfway through the period before it is eligible for review, both the UK and the EU are feeling much more comfortable with the arrangement, for all the enduring deficiencies and anomalies within the Windsor Accord and the unsatisfactory hotch-potch deal brokered for Northern Ireland. A substantial re-negotiation merely says to Brussels that the UK is open to giving significant concessions; in return for what? An inkling is the plan (and this is not new) floated this week by the foreign ministers of France and Germany of a multi-layered EU: the UK might be eligible for “Tier 3” status: given access to the Single Market and the Customs Union with all the obligations as well as potential benefits; with not being bound to join the Euro, but the price for all this would be a financial ‘contribution’ to the EU central budget, no access to the Common Agricultural Policy and, critically for trade, capital and people, UK courts being fully subsidiary to the superiority of the ECJ, and the UK having zero direct representation in Brussels and not participating in EU elections to the European Parliament. The EU would have us trussed up in its rules in return for mutual market access, but without the hassle of having the UK at the table in negotiations determining EU policy (incidentally, under current terms, membership of the Customs Union would preclude the UK signing any further trade agreements with other countries). Is that really progress for The City and business?
A dose of fiscal reality
Assuming the current Tory administration sees no deviation from its policy of being casual about growth, tax and debt (remember, Hunt’s “eye wateringly difficult challenges” are not so eye wateringly difficult they cannot be delayed beyond the election into 2025), Labour would inherit an unenviable fiscal position: the highest tax burden in history, an economy whose government debt is equivalent to the national GDP and where 4% of that total GDP is frittered away on interest charges. Alongside the urgent need for public sector reform (notably but not only the NHS), the defining challenge for the next government will be climate change policy. Sunak has already attempted to introduce pragmatism and the ‘honest conversation’ with the electorate to unravel a previously undeliverable programme of change and investment on the path to the nirvana of carbon net-zero by 2050. A couple of months ago in Washington, Rachel Reeves unveiled Labour’s version of the environmental portion of Joe Biden’s Inflation Reduction Act. As we wrote about at the time in these columns, what was dubbed “Surenomics” was the plan to invest/spend £140bn, £28bn a year over five years, on ‘green’ investment (cheerfully described by an aide as “Bidenomics on steroids!”). It contained no funding plan. Already, that programme has been watered down. But the ambition remains, alongside all the usual commitments to normal day-to-day government spending.
Perhaps business and the City so keen to back Labour should pause and commit to memory two pertinent points: first, that back in 1997, New Labour’s Gordon Brown inherited an immensely strong financial position from his Tory predecessor Kenneth Clarke. Bown committed to retaining Tory spending plans. The programme was christened Prudence. That promise of Prudence’s fiscal chastity lasted no more than two years; by the time Labour was voted out in 2010, Prudence was in penury.
Second, that the immense cost of meeting carbon net-zero commitments has not gone away, nor is it likely to decrease; Sunak might be postponing the pain, but his remedy outlined this week is no more efficacious than that of taking an aspirin to cure a persistent tumour. Markets worked themselves into a lather 12 months ago about the unfunded £2bn to reduce the top rate of tax from 45p to 40p in the now infamous, strangled-at-birth, Trussnomics experiment. They seem remarkably sanguine about piling a figure which may yet approach £140bn on to a government balance sheet that is already 100% geared and which, so far, has no funding plan behind it to mitigate the mounting debt.
At some stage in this mutual love-in with Labour, the City and business might come up for air and ask themselves whether they’ve been tossed a bone, or are they instead being sold a pup. Time will tell soon enough.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
Perhaps business and the City so keen to back Labour should pause and commit to memory two pertinent points: first, that back in 1997, New Labour’s Gordon Brown inherited an immensely strong financial position from his Tory predecessor Kenneth Clarke. Bown committed to retaining Tory spending plans. The programme was christened Prudence. That promise of Prudence’s fiscal chastity lasted no more than two years; by the time Labour was voted out in 2010, Prudence was in penury.
Second, that the immense cost of meeting carbon net-zero commitments has not gone away, nor is it likely to decrease; Sunak might be postponing the pain, but his remedy outlined this week is no more efficacious than that of taking an aspirin to cure a persistent tumour. Markets worked themselves into a lather 12 months ago about the unfunded £2bn to reduce the top rate of tax from 45p to 40p in the now infamous, strangled-at-birth, Trussnomics experiment. They seem remarkably sanguine about piling a figure which may yet approach £140bn on to a government balance sheet that is already 100% geared and which, so far, has no funding plan behind it to mitigate the mounting debt.
At some stage in this mutual love-in with Labour, the City and business might come up for air and ask themselves whether they’ve been tossed a bone, or are they instead being sold a pup. Time will tell soon enough.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
Authors
Investment Manager, Jupiter Independent Funds/Merlin
Investment Manager & ESG Investment Director, Independent Funds/Merlin
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