Labour landslide keeps the markets happy

Labour’s landslide victory in last week’s General Election was broadly welcomed by the financial markets.

The one thing that the markets dislike more than anything else is uncertainty – something that was never likely to be an issue with Sir Keir Starmer’s party maintaining their 20-point poll lead throughout the six-week campaign.

The new Government has also been painstaking in its efforts to demonstrate its commitment to fiscal responsibility, including ruling out any increases to the rates of income tax, national insurance or VAT.

The business community has also been largely supportive of Labour’s focus on growth including positive noises about sweeping away some of the planning restrictions that have hampered the housebuilding industry for so long.

There are also hopes that the Bank of England will cut interest rates from the current level of 5.25% in the next couple of months, although this was tempered slightly this week when the Bank’s chief economist Huw Pill told a think tank in London that it was “still an open question on whether the timing for a rate cut is now”.

Looking further ahead, only time will tell whether Labour’s confidence about creating growth in the UK economy comes true. At the end of the day, the only levers to fuel spending are economic growth, tax rises or increased borrowing.

In the minds of the now Conservative opposition, several economists, and think tanks including the influential Institute for Fiscal Studies, the Labour government is likely to need to tweak taxes in some way to meet its goals.

Speculation surrounds potential changes to capital gains tax allowances. Making tax relief on pensions less generous is another potential area that could come under scrutiny, along with Inheritance Tax.

With Labour saying it is unlikely to hold a Budget until the Autumn, now is the time to take advice on any potential adjustments you may wish to make including increasing pension contributions. It is highly unusual for governments to introduce tax changes retrospectively.

While the UK gets used to a Labour government with a huge majority and a Cabinet eager to hit the ground running, the picture looks less certain on the other side of the Atlantic.

An embattled President Joe Biden is seemingly fighting for his political survival with several Democrat politicians and even the Hollywood star George Clooney calling on him to step aside and allow time for a new candidate to be chosen to take on former President Donald Trump in November’s Presidential election.

The markets have so far remained steady because Biden or Trump are generally viewed as providing a level of certainty. Both are known quantities. Should Biden decide to drop out of the race for the White House, there is then likely to be a period of uncertainty while the Democrats choose a new candidate to take on Trump later this year.