Scott Kingsley, Senior Wealth Advisor
Politics and finance are two topics often discussed in tandem. As we approach the UK general election on July 4th, there is much speculation about how a potential change of government will influence taxes, economies, and investment.
While it is dangerous to look to the past for indications of future changes, it is crucial to appreciate the differences (or, to a certain extent, the lack of) between the current Conservative government and a potential incoming Labour government.
In this article, we will examine politics, its potential impact on the wider economy and personal finances, and how politics and finance are interlinked.
Before we examine taxes, economies, and investment in more detail, it's important to add a degree of political context to the discussion. Opinion polls currently suggest that the Labour Party is on track to secure a significant majority in the Houses of Parliament. While nothing is ever set in stone, and we have seen significant turnarounds in the past, after 14 years of a Conservative government, there appears to be an appetite for change.
This then brings us to the stereotypical historical image of the Labour Party, which has at times revolved around significantly higher taxes – often described as a tax and spend party. Many would argue this is not the case today, as the Labour Party has matched several Conservative tax pledges.
When we discuss politics and finance, it is only a short time before the topic of tax emerges. As we stand today, the pledges by the two main political parties about income tax and VAT are identical, with no plans to increase rates. It is also a similar matter regarding corporation tax, with these combined income streams generating the bulk of government income.
On the topic of personal wealth, there are many additional issues to consider, such as:
The Conservative's long-term ambition is to abolish national insurance, while the Labour Party is conscious of removing a multibillion-pound income stream. Two recent reductions in national insurance rates by the Conservative government are already putting extra money in the pockets of households up and down the country.
The inheritance tax threshold was frozen in 2009 at the current level of £325,000, deviating from the previous policy of increasing allowances in line with inflation. To put this into perspective, the rate would now stand at £501,089 if it had risen in line with inflation up to April 2024.
Partially offsetting the freezing of the inheritance tax allowance, we saw the introduction of the residence nil rate band in 2017. Set at £175,000, this offers a means of protecting your family home from potential inheritance tax liabilities.
The parties differ widely on this headline topic, with the Conservatives seeking to keep the current status quo while a Labour government would look to begin charging VAT on private school fees. Private education has always been a hot topic in politics and finance.
Looking at the broader issue of taxation, whichever government is in office after the election, there really is limited scope for immediate tax rises due to the state of UK finances. This is one of the main reasons why, at the moment, the tax policies of the leading two parties have more similarities than usual.
Other issues will emerge on taxation, but compared to the main drivers, they are akin to tinkering around the edges.
Short to medium-term economic growth significantly influences not only personal finances but also the finances of the government and the broader country. Therefore, it's essential to look at recent performance, current performance, and forecasts for the future.
Measured by year-on-year growth in Gross Domestic Product (GDP), the performance has been mixed in recent years:-
Data: ONS
While the UK entered a technical recession towards the end of 2023 (two consecutive quarters of negative growth), there was a strong rebound in the first three months of 2024, with GDP increasing by 0.6%. This was ahead of the consensus of 0.4% and prompted some economists to favourably review their full-year forecasts for 2024.
The IMF increased its 2024 forecast for the UK economy from 0.5% growth to 0.7% while maintaining a 1.5% growth forecast for 2025. On the topic of politics and finance, there has yet to be any significant comment on the impact a change of government may have on the short to medium-term outlook.
Regarding monetary policy, both of the leading parties are looking to reduce interest rates as quickly as possible while maintaining a relatively low inflation rate. There are some diversions in fiscal policy, with a potential Labour government perhaps more inclined to increase public sector spending. However, all of this will be done within the context of challenging economic times, personal tax levels at 70-year highs, and limited forecast economic growth in the short to medium term.
The last few years have seen significant financial challenges such as Brexit, Covid, high inflation and interest rates, all combining to create a cost of living crisis. This has dented the short-term prospects for businesses, consumer spending and the broader economy, as seen in the recent volatility of GDP growth. If we look at the wider context, what we are witnessing today on the political front is not wholly surprising - a growing appetite for change.
There will always be a degree of adjustment if we see a change in government, although investors may benefit from a policy refresh. That said, many believe that the stock market tends to look forward at least nine months, so in theory, much of the political and financial issues ongoing today are already priced into the market – which recently hit an all-time high.
The focus is on personal and business taxation, where there is little room for manoeuvre for the next government, no matter their political persuasion. We may see some movement on pension taxation, but there is a degree of uncertainty in this area. It will undoubtedly be a very different situation once the new government is bedded down, but so far, there have been no significant policy changes impacting investor sentiment.
While there is a degree of uncertainty regarding pensions, protection limits, and taxation, the Labour Party has confirmed support for the incoming British ISA. Under the ISA umbrella, investors will be allocated an additional £5000 to invest in UK companies. While many people have strong views on investment and Labour policies, more experts are welcoming of a potential government change.
As we alluded to earlier, the stereotypical perceptions of the Conservative Party and Labour Party are not as strong today as they have been in the past. While part of this is due to the current economic climate, the parties are also fighting for the centre-ground vote. However, politics and finance are highly fluid subjects, and changes tend to occur on a regular basis.
There are several obvious factors which will impact the performance of UK stocks in the short to medium term, such as:-
Even though the UK FTSE 100 recently hit a new all-time high, the underperformance over the last ten years compared to the Dow Jones Industrial Average and the MSCI World Index is significant, to say the least:-
There is an ongoing push by the UK government, which is likely to be taken on by the next government, to make the UK more attractive from a regulatory, taxation and investment point of view.
A recent note from Schroders suggested that the forward price-earnings ratio for UK companies against their US counterparts is currently at a discount approaching 50%. This is undoubtedly an area where politics and finance can work together for the greater long-term good of markets and investors.
However, stepping back and looking at the situation from a distance, a potential change from a Conservative to a Labour government could see various pros and cons for specific sectors:-
There will likely be a mix of additional help (although more regulations) for financial services, technology and healthcare. At the same time, the energy sector is rumoured to be facing another windfall tax.
As we touched on above, there is a belief that markets tend to look forward circa nine months, so a potential/probable change of government (based on what we know at the moment) is likely to be factored into market valuations today.
As we approach the general election, there is a degree of anticipation and concern about potential fiscal and monetary policy changes. The two leading parties' approaches to politics and finance are very different in theory, but in practice, due to short-term economic limitations, their policies are more aligned than they have been in years past.
There are areas where we are likely to see some change, with pensions mooted as a favourite, although any economic tweaks are likely to be minimal in the early days. However, it is still important to plan ahead regarding your finances and investments to ensure that you maximise tax relief and tax breaks today to enhance your returns further down the line.
If you would like to discuss any concerns about political change and the potential impact on your long-term finances, please get in touch today.
It costs nothing to have a conversation, and it could be one that changes your life.