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The market implications of a Labour government

If polling is to be believed, the UK is likely to see a change of government following the general election on 4 July. What are the implications of a Labour victory on your investments?

| 12 min read

Sir Keir Starmer seems likely to be granted the keys to Downing Street when the UK holds a general election at the start of July.

At the launch of the Labour Manifesto, Sir Keir reiterated his party’s pledge not to raise taxes, despite reports from the Institute for Fiscal Studies (IFS) that tax rises would be necessary to maintain current levels of departmental funding.

The Labour leader said that the party won’t be raising income tax, national insurance, or VAT.

This is likely to make significant spending increases difficult, considering the parlous state of Britain’s finances. In the financial year 2023/24, government revenue – from taxes and other receipts – was £1,095bn while government spending was higher at £1,216bn. The deficit was therefore £121bn, equivalent to 4.4% of GDP. The deficit was the UK’s eighteenth largest since 1948, with borrowing of £121bn being equivalent to around £1,780 per head of the UK’s population.

Labour has already had a warning from the market about sensible budgetary planning in the form of its negative reaction to Liz Truss and Kwasi Kwarteng’s ‘mini budget’ in September 2023, which included £45bn of unfunded tax cuts.

There was no explanation of how these tax cuts would be paid for and there was no accompanying assessment of its plans by the government's official spending watchdog, the Office for Budget Responsibility.

The result was a spike in the cost of government long-term borrowing. In the following days, the pound fell to record lows against the dollar and there were further sharp increases in long-term gilt yields. This increase fed through into rising mortgage rates with hundreds of products withdrawn from the market. The Bank of England described the speed and scale of movements in interest rates on UK government bonds as "unprecedented". It had to step in to safeguard the pensions sector with a support scheme.

So, Sir Keir knows he will have to tread carefully. Pressure on budgets will increase across the five-year term as government borrowing is refinanced at higher rates. The cost of interest payments on the government is going to rise without any additional spending as existing gilts mature and debt needs to be rolled over.

Nevertheless, strategists at JP Morgan have said they believe a Labour election victory will be a “net positive” for financial markets, due to its “centrist platform”. It argued that Labour’s policies would be “modestly pro-growth, but crucially with a likely cautious fiscal approach”. There are hopes that policy will be predictable, thereby giving market participants the confidence to take longer-term investment decisions.

Under the new leadership, the party has also pursued a more pro-business stance and plans an industrial strategy and other pro-growth policies. There was nothing of great surprise in the party’s manifesto, with most policies being pre-announced. Other key pledges include:

  • Cut NHS waiting times with 40,000 more appointments each week.
  • Launch a new Border Security Command with hundreds of new specialist investigators.
  • Recruit 6,500 new teachers in key subjects.
  • Free breakfast clubs in every primary school.

So, what are the potential implications of a Labour government on a sector-by-sector basis. Some of these are costly and the party will need to explain how these will be funded.

Personal finance: What could a change of government mean for your money?

Energy

The Labour Party plans to create Great British Energy, a new, publicly-owned clean-energy company. Labour claims it will harness Britain’s sun, wind, and wave energy to:

  • save £93 billion for UK households,
  • deliver one hundred percent clean power by 2030,
  • cut energy bills for good,
  • create thousands of good local jobs,
  • deliver energy security,
  • And make the UK energy independent.

A Labour government would clearly be turning its back on the oil industry – as much as it will be able, given the likely pedestrian pace of the energy transition. It also intends to increase the current tax squeeze on the industry to fund spending commitments elsewhere.

The Conservative government imposed a 35% levy on UK oil and gas producer profits in 2022 after a jump in energy prices, which means they face an overall tax bill of 75%. Labour wants to increase that to 78% and extend it to 2029, as well as remove investment allowances. Sir Keir dropped plans to backdate the windfall tax to the start of 2022, after significant industry pressure. Investment bank Stifel has calculated that, in a worst-case scenario, it could lead to the loss of 100,000 jobs, should no new drilling be allowed.

The potential change in tone has already resulted in some companies delaying key investment decisions. In early June, three oil and gas companies – Jersey Oil and Gas, Neo Energy, and Serica Energy – said they had decided to delay by a year the planned start of oil production at Buchan, an oilfield in the North Sea 120 miles to the northeast of Aberdeen. The joint venture partners linked the decision to the timing of the election.

Representatives of other North Sea operators, such as Ithaca Energy, have admitted they have “slowed down our investment programme quite significantly because of the instability" caused by the windfall tax. Deltic Energy has also abandoned a North Sea project over what it called “negative political rhetoric”.

Oil majors such as BP and Shell have greater financial foundations than most but will still see an impact from the UK’s change in tax regime.

Defence

The geopolitical backdrop is tense, with the world seemingly divided into a US-led bloc and an autocratic bloc led by China and Russia, so defence matters. Defence is usually safe home ground for the Tories. In contrast, under NATO critic and lifelong opponent of nuclear weapons Jeremy Corbyn, the Labour party seemed equivocal about the nuclear deterrent.

However, the new Labour leadership has declared an unshakeable commitment to Trident, our nuclear deterrent, and said it will raise defence spending to 2.5% of gross domestic product (GDP) “as soon as resources will allow”.

The potential for an increase in defence spending, with a commitment to build four new nuclear submarines in Barrow-in-Furness, will be positive for the UK’s defence business, especially BAE Systems, Babcock, and Rolls-Royce. The sector is already doing well after the shock invasion of Ukraine by Russia in June 2022. BAE Systems already has a record order book and is helping build next-generation nuclear-powered submarines as part of the AUKUS security pact, Qinetiq recently upgraded its guidance to the market after a strong year, and Chemring has predicted “a decade of rearmament”. The sector is currently in rude health – and a change of government is unlikely to change this.

Housing

Labour has already made some strong pledges about housing. It argued that the current planning system isn’t working. The party has vowed to build on “grey belt” land – which it defines as “neglected areas such as poor-quality wastelands and disused car parks that are in the greenbelt”. Labour says there are no plans to allow building on genuine nature spots.

The party says this could help 80,000 more young people onto the housing ladder over the next five years. It would make permanent the current mortgage-guarantee scheme, which helps people get a mortgage with low deposits but had been due to expire in June 2025. This could be positive for UK housebuilders such as Taylor Wimpey, Bellway, and Persimmon which have suffered over the last few years in the rising interest-rate environment, which makes mortgages more expensive.

However, the main thrust of its housing policy is affordable housing. It has pledged to build 150,000 new social homes a year, 100,000 of which will be council homes. There will also be significant investment in the current housing stock. This will be helpful for Britan’s builder’s merchants such as Travis Perkins, which issued a profit warning last year, and also construction group Vistry, which pivoted to being a partnership builder focused on social-housing construction last year.

Clearly, this will involve substantial public investment and funding may be a challenge, given the state of the government’s finances. However, if Labour can reform the planning system and build a significant amount of affordable and social housing, it could help temper rent rises in the private market.

There may be significant impacts to landlords should demand in the private-rental sector wane – and there is also talk of the introduction of rent controls. This would be disincentivising for landlords to invest in the rental sector.

Banking

Labour has been seeking to win friends in the City amid concerns the Square Mile will be a target for a tax raid. The party has said it is not looking at imposing a windfall tax on bank profits if it wins the general election or at introducing a financial transaction tax.

The idea of a windfall tax on banks took off as the Bank of England hiked interest rates, boosting lenders’ profits as they pocketed the difference between the central-bank rate and the rate paid to depositors, known as the net-interest margin. However, the City appears to have escaped a tax squeeze for now.

Utilities

Water companies are likely to come under pressure. Labour has said it will put water companies under special measures to clean up our waters. The three water companies currently quoted on the London Stock Exchange are Pennon, United Utilities, and Severn Trent. Policy statements include:

  • Giving the water regulator powers to block the payment of any bonuses until water bosses have cleaned up their filth.
  • Water bosses who oversee repeated law breaking will face criminal charges.
  • Ending self-monitoring and forcing all companies to monitor every single water outlet under independent supervision so companies can no longer cover up illegal sewage dumping.

Ofwat, which regulates the water industry in England and Wales, has delayed publication of its draft price-control determination for the water sector by one month until after the upcoming UK general election. The announcement had been expected on 12 June but will now be made on 11 July, one week after voters go to the polls. Ofwat said the decision was in line with Cabinet Office guidance. Ofwat sets price controls for the water sector every five years. The price controls set as part of the current price review will still come into effect on 1 April 2025, despite the later publication for its draft determinations on water company business plans.

Rail

In April, Labour promised to nationalise the rail industry. The party pledged to bring all passenger rail into public ownership as contracts with train operators expire. This policy does not apply to rolling stock. This is likely to impact companies such as FirstGroup and Go-Ahead Group.

Outsourcing

Against the backdrop of growing public scepticism towards outsourcing, at the 2022 Labour conference Angela Rayner pledged to oversee the “biggest wave of insourcing for a generation.”

How serious the party is about that remains to be seen. “Public services should be in public hands, not making profits for shareholders,” was one of Keir Starmer’s 2020 Labour leadership pledges. However, Sir Keir has rowed back on this since, telling Andrew Marr that private provision was “likely to have to continue” in the NHS. Any cutback in outsourcing could hit sector players such as Mitie, Serco, and Capita.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

The market implications of a Labour government

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