Written by:
Alex Chappell
Investment Manager at Amber River DB Wood
It is now almost certain that Andy Burnham will be the next UK Prime Minister after his win last week in the Makerfield by-election.
There has rarely been such a gap between what politicians say they are going to do, and what they actually do. Trump campaigned on ‘balancing the budget’ and ‘stopping forever wars’, and here we are, a year and a half into his second term with the highest deficit in memory and a new conflict in the Middle East. In fairness to him, it does look like he has stopped that war, but he also started it, and the ‘I’ll solve Ukraine in a day’ doesn’t seem to have followed. Immigration is perhaps really the only big campaign promise that has been followed through.
This current Labour government have followed a similar trend. Promising not to raise the main tax rates but then leading with the biggest tax hikes on record in their first two budgets. Committing to increase the defence budget significantly, but because of their other spend commitments (£131bn extra committed in their first two years), there is no fiscal headroom. Promising to ‘stop the boats’ but so far, not delivering meaningful change there. Their plans to ‘tax the wealthy’ have landed in many ways on working families, with income tax to be levied on Cash ISA’s and Inheritance tax on private pensions, both with effect from next April. The ongoing building out of the welfare state system part funded through tax rises (employers National Insurance), and increased borrowing have, in combination with a 26% rise in the minimum wage over the last 24 months (Trading Economics) only helped to destabilise a corner stone of the British economy which is small businesses.
Given all that, it is probably no wonder that both Sir Kier Starmer and President Trump’s polling has consistently trended down since they were elected. The former has of course now resigned and will leave government over the coming weeks or months. His downfall is being portrayed as due to a fragmenting party, though in reality I think it was more that he didn’t deliver on what he said he stood for. It is a quirk in the British democratic system that more easily allows a change in the head of government than that of the US for example, but at least it reinforces accountability.
It is now almost certain that Andy Burnham will be the next UK Prime Minister after his win last week in the Makerfield by-election. If his political history is anything to go by, he is slightly more left leaning than Sir Kier, which would signal more spending and tax to come. That said, he has also only recently announced that he would keep to the previously agreed fiscal rules. Investment markets the International Monetary fund (IMF) and credit agencies globally feel he would be wise to do so.
If there is one thing we can all probably agree on about the US, it is that their light regulatory regime and investment into the tech sector has (so far) paid off handsomely.
With government debt levels at close to 100% of GDP, sticking to some form of fiscal discipline is arguably the most important factor in determining a successful or otherwise, government. Not doing so was the downfall of both Liz Truss and Sir Kier, both for different reasons. Ultimately, we cannot afford to spend more if we do not produce more growth (and therefore tax receipts) and we cannot afford to tax more if it restricts growth (and therefore tax receipts). If there is one thing we can all probably agree on about the US, it is that their light regulatory regime and investment into the tech sector has (so far) paid off handsomely. Like that, the UK needs changes that promote and reward entrepreneurship with investment into sectors that provide a commensurate return on that investment, versus the current investment program which delivers little if any direct economic benefit.
Andy Burnham will therefore take over the UK political landscape and inherit all of these challenges. He has talked about changing politics, and there should be optimism and hope that he changes things for the better. Quite positively, on the economic side, we can see a window of opportunity. With the Strait of Hormuz now open, we’ve seen oil prices fall back from $90-100 back to the mid $70s. Inflation therefore, should fall back over the coming months, and with the expectation that the UK’s economic data continues to be benign at best, we feel interest rate cuts will come through perhaps later this year though more likely in quick succession in 2027. Lower interest rates should stimulate growth, and therefore increase tax receipts, whilst at the same time reducing government borrowing costs.
If Andy Burnham and his team share our view, and he appoints a respectable and balanced cabinet (Wes Streeting for example as Chancellor would be seen as positive by bond markets), the economic back drop might well be supportive of improving growth in the next two years. At the same time inflation will be falling, leading to a reduction in UK debt levels to provide Burnham with some firepower to deliver his longer-term objectives. I don’t know who should be more excited about that prospect, Andy Burnham or our bond portfolio?
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