For all our sakes, let's hope Labour's plans create some wealth and happiness for all

6 July 2024, 21:24 | Updated: 8 July 2024, 10:54

By David Buik

@truemagic68

Last week Labour won a historic landslide General Election, with an overall majority of circa 170 – just short of Tony Blair’s 178 seat majority in 1997.

With the Conservative party split like a ‘cat-o'-nine-tail’ whip, Labour also owes a huge debt of gratitude to Nigel Farage and Reform for so egregiously and cunningly attracting 4,072,947 voters on Thursday, with the Tories only persuading 6,755,953 voters to remain loyal to their cause.

Reform’s influence at the polling booth sent Sir Keir and Lady Starmer cruising to No 10 Downing Street, probably for a decade. I hope the PM and Lady Victoria will be hosting a celebratory party for Messrs Farage, Tice, Lowe, McMurdock, Anderson and Habib.

With Labour only attracting 33.9% of the total votes, it is clear that the country is far from convinced in Labour, despite its massive majority, thanks to the ‘first past the post’ system we have in the UK. Sir Keir Starmer and his government are seeking to deliver what the country wants – stability and the creation of wealth to provide significantly improved public services, especially the NHS, welfare and education.

And after the turmoil of the last five years, it is hard to believe that the country would not want Labour to succeed. That should include the 66.1%, who did not and would not have wanted to vote Labour.

The UK stock market, unlike its French equivalent remains steady, even cautiously optimistic. A large Labour majority, which all polls had predicted for at least the last six months, has been priced into the market. The pound has strengthened to $1.2725 against the dollar. It is hard to read the gilt-edged market, as yields remain largely above 4%, despite inflation coming back towards 2%.

The Bank of England’s monetary policy committee may start to cut rates in August, though more than one 25 basis point cut this year seems unlikely, with inflation remaining stubbornly resistant in the US. Sadly, it’s a fact of life, our interest rate structure is in part influenced by the US’s and the Federal Reserve’s policy. Mortgage rates have and are continuing to ease gently in the UK, but to expect wholesale cuts in the next year might be folly. Markets have remained calm and are likely to do so for up to a year.

Let’s be candid: Labour’s economic honeymoon may only last a year. Until then, barring international geopolitical crises, everything in the garden looks relatively rosy. The fiscal headroom for the government is between £8-£16bn, which strikes me as narrow, when considering Labour’s bold plans and Chancellor Reeves’s promise to maintain fiscal discipline. Ms Reeves is hell-bent on growth to deliver revenue for public sector needs and quite rightly so.

PM Starmer and Chancellor Reeves plus Jonathan Reynolds have ‘nailed their flag’ to the mast of growth. Labour believes that investment for growth purposes will come from stability, which it believes will emanate from the size of Labour’s majority. To me, that is a spurious comment. It needs to be backed up.

All credit to Labour, which has a well-considered infrastructure expansion plans encompassing ‘levelling-up’ which seems to have gone very quiet, after the HS2 debacle. The setting up of the National Wealth Fund is laudable and Ms Reeves deserves praise for endorsing the innovation of Great British Energy, with capital of £8.3 billion.

I must put in the caveat that Energy Secretary Ed Miliband must not be allowed ‘to run too green.’ He must be ‘kept on the bridle on a very short rein’ by the government. However, more incentives than just profound statements are required to encourage inward international investment. It is also good to see the formation of the British Business Bank under Louis Taylor. These are all positive initiatives.

Notwithstanding all these exciting plans, at the end of the day, if growth remains sluggish, which many economists suggest may be the case across the western world, Labour’s huge agenda will be caught short of funds. Yes, further borrowing for capital expenditure could be tolerated, but the continuing demands for public sector wage increases would leave the government in a fiscal bind.

It would be foolish also to forget the debts the government has to pay on top of public sector requirements – Windrush, Postmasters, Infected Blood, destitute local government, to name but a few, all must be settled. So, there is not a great of leverage, unless growth selects another gear.

I hear very encouraging news about Chancellor Reeves. She also comes highly recommended by Andy Haldane, the former Bank of England Chief Economist and CEO of the RSA, who is effusive in his praise for his former charge at the Bank of England. That should reassure us.

I am told by analysts that house building shares may offer some value, if the Government’s housing targets are to be met. Banks, after 15 years in the wilderness, have started to perform with significant aplomb, aided and abetted by higher interest rates, which have provided greater margins of profits – NatWest +47%, Barclays +41%, Lloyds +21% year to date). Since 2010, UK banks have been reluctant to expand their lending, partly because they have been required to put up ten times the amount of capital to do the same business.

Let’s hope this new environment, which encourages the expansion of business activity, will see this sector continuing to thrive. With fintech on fire and the SME sector offering some great opportunities for investment, let’s hope UK banks respond to the challenge.

It is noticeable that Labour has kept very quiet about an increase in taxation unconnected with direct taxation (income and NI). Conversely the Tories have banged the cutting-tax-drum too loudly. Labour seems to have been very quiet on other forms of taxation, which could be introduced. I hope the government has not been disingenuous about their plans, if the economy slows down.

Excessively draconian taxation on capital gains, inheritance tax, windfall tax or tax on pensions will kill growth, throttle incentive in a heartbeat, sending investors scurrying for the hills. It will not have escaped the government notice that financial services employ 2.5 million people and generates £100 billion per annum for the Treasury (12% of GDP).

There are about 60,000 wealthy people in the UK. Many have already packed their bags in recent months and many others are under starter’s orders. My message to Labour is ‘Don’t throw the baby out with the bath water.’ The after-effects could be devastating!