Merlin Weekly Macro: Spotlight on Labour’s economic plans
Merlin Weekly Macro: Spotlight on Labour’s economic plans
With Labour set for a large majority as Sunak’s electoral gambit fails, the Jupiter Merlin team discuss the economic plan of the UK’s government-in-waiting.
Redrawing the political map
‘Sunk’ and ‘Starter’: our irreverent names for the two key protagonists in the 2024 UK election. Rishi Sunak’s prospects are rapidly being engulfed by the Reform Party whose leader, Nigel Farage, is determined to destroy the Conservatives. If the ‘TORY WIPEOUT’ headlines are accurate, Farage’s wish may yet be granted. Keir Starmer, Prime Minister Apparent, starts out with zero experience of government and a cartload of political baggage he does not like to be reminded of (in the recent Sky interviews, asked three times: ‘Did you back Jeremy Corbyn in 2019, yes or no?’, he replied obliquely on each occasion, ‘I thought we’d lose’, as if that were either an excuse or a direct answer). His persistent evasiveness makes him as slippery as an eel.
Sunak called the election on the gamble that the economic green shoots would serve him well. As it is, the latest monthly data showed that any growth, let alone ‘gangbusters’ growth, was ephemeral. It wilted again in May. On the other hand, inflation reverting to 2.0% is good news but for which the government can neither claim, nor will be accorded, little direct credit. That on 22 May the polling gap between Labour and the Tories was 22 percentage points and a month later is unchanged says Sunak’s punt has failed. His campaign has so far had zero effect in persuading the electorate that the Conservatives deserve five more years on top of the 14 they have already had. The result on election day in the hidden seclusion of the polling booth may shift the dial but surely not enough appreciably to dent Labour’s commanding lead. Which therefore puts all the focus and scrutiny on Labour about what sort of government we might expect.
Ahead of its manifesto publication we were calling for clarity and detail. What Labour subsequently delivered is a revealing document: as revealing in what it chooses to ignore as what it contains.
Sunak called the election on the gamble that the economic green shoots would serve him well. As it is, the latest monthly data showed that any growth, let alone ‘gangbusters’ growth, was ephemeral. It wilted again in May. On the other hand, inflation reverting to 2.0% is good news but for which the government can neither claim, nor will be accorded, little direct credit. That on 22 May the polling gap between Labour and the Tories was 22 percentage points and a month later is unchanged says Sunak’s punt has failed. His campaign has so far had zero effect in persuading the electorate that the Conservatives deserve five more years on top of the 14 they have already had. The result on election day in the hidden seclusion of the polling booth may shift the dial but surely not enough appreciably to dent Labour’s commanding lead. Which therefore puts all the focus and scrutiny on Labour about what sort of government we might expect.
Ahead of its manifesto publication we were calling for clarity and detail. What Labour subsequently delivered is a revealing document: as revealing in what it chooses to ignore as what it contains.
Spotlight on Labour: what you see…
Revelatory is the micro-detail of some of its policies. For example, in the Fiscal Plan/Changes within Departmental Spending section, Labour will put youth workers in A&E units and custody centres and youth mentors in pupil referral units at a total annualised cost of £20m, to be paid for by the full cost recovery on the granting of firearms licences; or filling in 1m potholes a year by deferring the A27 bypass, cost £65m annualised.
Some policy areas give comfort that Labour is approaching strategic issues sensibly: on defence, while it will not commit to the Tory plan to get to 2.5% of GDP by 2030 and at this stage sees the solution to cooperate more with France and Germany, it sets out a framework for investment in defence supply chains and addressing poor procurement. On the other hand, some flagship policies seem both daft and strategically incoherent. Energy is one: re-introducing the 2030 ban on the sale of new combustion engine vehicles, putting us five years out of sync with the EU (mutually the biggest export markets for vehicles for each of us), simultaneous with the 2030 target to achieve a zero-carbon electricity generating industry based purely on renewables is pie-in-the sky. Here we are at mid-summer 2024 and installing the infrastructure to plug the road network and home charging into the Grid has barely begun, let alone maximising the Grid’s capacity to meet the burgeoning demand. Others are contestable and will cause friction: growth is predicated on government infrastructure spending and domestic housebuilding, both requiring ripping up the planning laws (and removing many greenbelt protections) to do so.
Some policy areas give comfort that Labour is approaching strategic issues sensibly: on defence, while it will not commit to the Tory plan to get to 2.5% of GDP by 2030 and at this stage sees the solution to cooperate more with France and Germany, it sets out a framework for investment in defence supply chains and addressing poor procurement. On the other hand, some flagship policies seem both daft and strategically incoherent. Energy is one: re-introducing the 2030 ban on the sale of new combustion engine vehicles, putting us five years out of sync with the EU (mutually the biggest export markets for vehicles for each of us), simultaneous with the 2030 target to achieve a zero-carbon electricity generating industry based purely on renewables is pie-in-the sky. Here we are at mid-summer 2024 and installing the infrastructure to plug the road network and home charging into the Grid has barely begun, let alone maximising the Grid’s capacity to meet the burgeoning demand. Others are contestable and will cause friction: growth is predicated on government infrastructure spending and domestic housebuilding, both requiring ripping up the planning laws (and removing many greenbelt protections) to do so.
…and what you don’t
Equally revealing in the manifesto are the policy areas which are skimmed over, so threadbare in detail they ask many more questions than they answer. The biggest of these is tax, a subject it wants to avoid discussing. The UK government raised £1.1 trillion from all taxes in 2023/24; the extract that follows is the total sum of Labour’s intended tax policy: ‘The Conservatives have raised the tax burden to a 70-year high. We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.’ Apart from being specific about levying VAT on private education, yet more windfall taxes on energy companies, closing the Non-Dom loophole (already closed by the Tories), and cracking down on tax avoidance, this is all that Labour is prepared to reveal about its tax plans.
Given the paucity of detail, excepting the small number of specifics that will not happen, by implication all other areas of personal taxation must still be under consideration for inclusion in a future budget. Consider: there is zero reference to Capital Gains Tax (CGT); so in among all the other taxes Starmer says Labour will ‘not increase,’ CGT is likely to be a target for raising more revenue; Angela Rayner is on record as saying this would probably be by harmonising the CGT rate with the taxpayer’s marginal rate of income tax. There is also the question of what other assets CGT might be applied to: it was only after a Labour colleague replied evasively in a media interview to the question about housing that Starmer was subsequently forced to hurry out a clarification that there will be no CGT on main residence sales; but the nature of the reaction allowed the inference that it has been discussed and may be considered again in future. Also completely absent is any discussion of Inheritance Tax (IHT): another one for ‘reform’, surely (whether the tax-free allowance, the IHT rate, or the 7-year gift exemption), including the exemption on agricultural land, placing the continuity and security of farming and food production in jeopardy (without the tax shield ensuring continuity of ownership it is likely that agricultural land values will drop significantly).
Given the paucity of detail, excepting the small number of specifics that will not happen, by implication all other areas of personal taxation must still be under consideration for inclusion in a future budget. Consider: there is zero reference to Capital Gains Tax (CGT); so in among all the other taxes Starmer says Labour will ‘not increase,’ CGT is likely to be a target for raising more revenue; Angela Rayner is on record as saying this would probably be by harmonising the CGT rate with the taxpayer’s marginal rate of income tax. There is also the question of what other assets CGT might be applied to: it was only after a Labour colleague replied evasively in a media interview to the question about housing that Starmer was subsequently forced to hurry out a clarification that there will be no CGT on main residence sales; but the nature of the reaction allowed the inference that it has been discussed and may be considered again in future. Also completely absent is any discussion of Inheritance Tax (IHT): another one for ‘reform’, surely (whether the tax-free allowance, the IHT rate, or the 7-year gift exemption), including the exemption on agricultural land, placing the continuity and security of farming and food production in jeopardy (without the tax shield ensuring continuity of ownership it is likely that agricultural land values will drop significantly).
Labour’s defining problem: who is a ‘working person’?
But most problematic for Labour’s personal tax policy is this vague term ‘Working People’ used frequently but never defined in print. Even the Labour leader and his chief treasurer cannot agree. Put on the spot on the Nick Ferrari LBC radio show this week, Starmer was forced to clarify that in his own version of Labour-speak, a working person is one with no savings: ‘people who earn their living, rely on our [public]services and don’t really have the ability to write a cheque when they get into trouble’ (the inescapable inverse logic of which is that anyone who saves and can write a cheque is not a ‘working person’). 24 hours later, grilled by Nick Robinson on the Today Programme, Shadow Chancellor Rachel Reeves clouded murky waters further: for her, working people are those ‘who go out to work or draw their occupational pensions’.
A fog of confusion and obfuscation; what to make of it all? Firstly, history says that even if taxation rates are left unchanged, governments habitually use the allowances and bands as a means of raising the nominal tax take by stealth (known technically as ‘fiscal drag’); this option has not been discounted by Reeves. Second, until it is unequivocally ruled out, we must assume that outside tax-protected ISAs any form of savings income, whether from dividends, cash interest, investment property rents, personal pension plans etc may be eligible for an unearned income surcharge, possibly by levying National Insurance on these streams as has been ‘socialised’ for discussion among Labour strategists. Third, desperate to try and avoid the term ‘wealth tax’, it is also being suggested that fundamental reform of the way Council Tax is levied will include a more targeted approach at the value of property assets, including the potential value of a garden to the owner (this was originally an idea of John Prescott’s and today is in active use by the Labour administration in Wales). There is only one sensible conclusion: these are not stupid people; the very fact that the Labour leader and his Shadow Chancellor are being so imprecise and vague on tax policy is because all these mechanisms for raising revenue are still firmly on the table for future discussion and implementation.
After Jeremy Hunt abolished the pensions Lifetime Allowance in November, described as a ‘benefit for millionaires’ by Rachel Reeves, Labour immediately reacted by declaring it would re-instate the LTA (something of which we were highly critical at the time, showing as it did a remarkable lack of Labour’s understanding of how pension pots work). This did not appear in the manifesto. Whether it has been permanently scrapped or will return in the future remains to be seen, but for now, a significant relief to those planning the management of their retirement earnings.
A fog of confusion and obfuscation; what to make of it all? Firstly, history says that even if taxation rates are left unchanged, governments habitually use the allowances and bands as a means of raising the nominal tax take by stealth (known technically as ‘fiscal drag’); this option has not been discounted by Reeves. Second, until it is unequivocally ruled out, we must assume that outside tax-protected ISAs any form of savings income, whether from dividends, cash interest, investment property rents, personal pension plans etc may be eligible for an unearned income surcharge, possibly by levying National Insurance on these streams as has been ‘socialised’ for discussion among Labour strategists. Third, desperate to try and avoid the term ‘wealth tax’, it is also being suggested that fundamental reform of the way Council Tax is levied will include a more targeted approach at the value of property assets, including the potential value of a garden to the owner (this was originally an idea of John Prescott’s and today is in active use by the Labour administration in Wales). There is only one sensible conclusion: these are not stupid people; the very fact that the Labour leader and his Shadow Chancellor are being so imprecise and vague on tax policy is because all these mechanisms for raising revenue are still firmly on the table for future discussion and implementation.
After Jeremy Hunt abolished the pensions Lifetime Allowance in November, described as a ‘benefit for millionaires’ by Rachel Reeves, Labour immediately reacted by declaring it would re-instate the LTA (something of which we were highly critical at the time, showing as it did a remarkable lack of Labour’s understanding of how pension pots work). This did not appear in the manifesto. Whether it has been permanently scrapped or will return in the future remains to be seen, but for now, a significant relief to those planning the management of their retirement earnings.
Growth: a leap of faith
Rachel Reeves repeated constantly in her Radio 4 interview, with the current tax burden and government debt being as high as they are, the availability of cash to boost public services depends on economic growth. Past governments relying on growth to provide the solutions have often been disappointed, left scratching their heads. All Labour’s fiscal costings, conditional on growth, are based on projections in year five of the next parliament, i.e. 2029. As we know, the accuracy of economic forecasting, including that of the Office of Budget Responsibility, diminishes exponentially every year beyond year one; by year five, the figures are little more than aspirational or informed guesses. Clearly there must be a plan, but as the military saying goes, ‘no plan survives first contact with the enemy intact’. In this case that first contact, the one most likely to knock the spending plans askew, is growth.
Governments can influence growth and improve its chances of being successful; but in an interconnected global economic system with many exogenous factors at work, they do not control it. The levers at their disposal which they do control include incentives to attract foreign direct investment; making UK businesses an attractive destination for investment by minimising taxes and removing as many frictional costs and unnecessary regulations as possible; increasing productivity; having a demonstrably vibrant, competitive private sector supported by a lean public sector in which efficiency is maximised and wastage minimised and a system with the least direct government interference. These all provide confidence of strong economic management. Given the current state of the UK economy, it will take years to get to that state, even if the ambition is there (Labour’s plans demonstrate minimal initiative for fundamental public sector reform, particularly health spending which already accounts for 12% of GDP). But the public sector and the unions will not give Labour the benefit of waiting to see if its economic plans come to fruition before more cash is committed to public services and welfare; they want action (and payback) now.
Governments can influence growth and improve its chances of being successful; but in an interconnected global economic system with many exogenous factors at work, they do not control it. The levers at their disposal which they do control include incentives to attract foreign direct investment; making UK businesses an attractive destination for investment by minimising taxes and removing as many frictional costs and unnecessary regulations as possible; increasing productivity; having a demonstrably vibrant, competitive private sector supported by a lean public sector in which efficiency is maximised and wastage minimised and a system with the least direct government interference. These all provide confidence of strong economic management. Given the current state of the UK economy, it will take years to get to that state, even if the ambition is there (Labour’s plans demonstrate minimal initiative for fundamental public sector reform, particularly health spending which already accounts for 12% of GDP). But the public sector and the unions will not give Labour the benefit of waiting to see if its economic plans come to fruition before more cash is committed to public services and welfare; they want action (and payback) now.
Mind the Gap: Labour’s sums don’t add up
As the go-to independent Institute for Fiscal Studies (IFS) – whose ideological bias tends towards centre-left Keynesian doctrine – says in its critique of Labour’s manifesto, Labour’s economic plans have zero room for manoeuvre or slippage. The fiscal elastic only stretches so far before it snaps. The combination of maintaining the Tory public spending plan (such as it was but already a subject of union disapproval) and introducing even the watered down green investment programme which still requires £17.5bn of borrowings all add up to either additional revenues being raised through taxation, or cutting public expenditure, or increasing government borrowings when Labour has explicitly committed to not doing so. As to additional resources, the IFS says ‘Labour’s manifesto offers no indication that there is a plan for where the money would come from to finance this.’ Unless growth surprises significantly on the upside and arrives sooner than most expect, the ability to resist tax rises will be almost impossible. Labour will find plenty of willing support on the Opposition benches from left-leaning LibDems, Greens and the SNP.
In the grim days of 2020 when lockdown was imposed, the central banks flooded the system with liquidity and the fiscal lifeboats were launched to keep the economy afloat, Chancellor Rishi Sunak’s economic plans were blown out of the water (it is worth remembering that while Starmer constantly attacks the Tories for ‘trashing the economy’, Starmer himself was unequivocal in demanding even more repressive lockdowns: each to be longer and more of them). We said then in these columns that it was inescapable that ‘society will be made to pay’. Given the conditions today, exacerbated by the political urgency to achieve carbon net-zero, that hypothesis is about to be severely tested.
However much Labour protests that it is a party of ‘growth’ and ‘wealth creation’, it remains inherently socialist. In this campaign, despite his unconvincing attempt to disavow his connection with Jeremy Corbyn, Starmer proudly defended his own socialist, working class credentials. The manifesto is explicit: ‘a new way of government…with one aim in mind: to put the country back in the service of working people’. Taking Starmer’s mangled definition of ‘working people’ at face value, the ambition is implicitly major redistribution of wealth.
If New Labour’s Tony Blair secured the abolition of Clause 4 of the Labour Party constitution (the requirement for public ownership), Starmer would partially restore it in the guise of nationalising the railways, re-writing the governance code for Royal Mail, and through the new Green Energy Investment schemes and the British Business Bank. If not direct ownership in all cases, they will involve significant direct government participation and regulation. In themselves these are not necessarily bad initiatives, though as champions of capitalism and free-market principles, we remain to be convinced that there are not better ways of achieving the same outcome.
In the grim days of 2020 when lockdown was imposed, the central banks flooded the system with liquidity and the fiscal lifeboats were launched to keep the economy afloat, Chancellor Rishi Sunak’s economic plans were blown out of the water (it is worth remembering that while Starmer constantly attacks the Tories for ‘trashing the economy’, Starmer himself was unequivocal in demanding even more repressive lockdowns: each to be longer and more of them). We said then in these columns that it was inescapable that ‘society will be made to pay’. Given the conditions today, exacerbated by the political urgency to achieve carbon net-zero, that hypothesis is about to be severely tested.
However much Labour protests that it is a party of ‘growth’ and ‘wealth creation’, it remains inherently socialist. In this campaign, despite his unconvincing attempt to disavow his connection with Jeremy Corbyn, Starmer proudly defended his own socialist, working class credentials. The manifesto is explicit: ‘a new way of government…with one aim in mind: to put the country back in the service of working people’. Taking Starmer’s mangled definition of ‘working people’ at face value, the ambition is implicitly major redistribution of wealth.
If New Labour’s Tony Blair secured the abolition of Clause 4 of the Labour Party constitution (the requirement for public ownership), Starmer would partially restore it in the guise of nationalising the railways, re-writing the governance code for Royal Mail, and through the new Green Energy Investment schemes and the British Business Bank. If not direct ownership in all cases, they will involve significant direct government participation and regulation. In themselves these are not necessarily bad initiatives, though as champions of capitalism and free-market principles, we remain to be convinced that there are not better ways of achieving the same outcome.
Warning! Labour May Damage Your Wealth!
It was Margaret Thatcher who said, ‘socialist governments traditionally do make a financial mess. They always run out of other people’s money’. Our industry is wealth creation; we swim in the pool labelled ‘Capital Markets’. The willingness to commit capital depends on being able to make a reasonable return for the risk investors take, including after taxes. The next five years certainly, quite probably the next 10, will determine whether a Starmer-led Labour government can reconcile its competing visions of wealth creation with redistribution, growth with increased regulation and intervention and cost. Or whether yet another Labour government, most recently like Gordon Brown’s in 2010 despite his determination to adhere to fiscal ‘prudence’ when installed as chancellor in 1997, will leave office as The Lady said, having ‘spent everyone else’s money’. We are about to find out.
How to mitigate the worst ravages of CGT?
At least one thing is clear, if it were not obvious enough as the CGT allowances already dwindle towards irrelevance under the present administration: if the CGT rate is also jacked up equal to the marginal rate of Income Tax, the argument for unitised investment solutions to mitigate against the worst ravages of CGT, solutions such as those provided by the Jupiter Merlin Portfolios, only becomes more compelling!
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.
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 & ESG Investment Director, Independent Funds/Merlin
Investment Manager, Jupiter Independent Funds/Merlin
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