PART 1 OF 3
Shaping Britain’s Future: Election Choices Ahead
As the United Kingdom prepares for a general election on 4 July, issues like the economic health of the world’s sixth-largest economy, taxes, immigration, and the NHS will likely dominate discussions and influence voters’ decisions.
Led by Prime Minister Rishi Sunak, the Conservative Party has been in power since 2010 and has gone through some difficult and challenging periods, including the COVID-19 pandemic and the ongoing conflict in Ukraine. Two other key factors, the austerity measures following the global financial crisis and the 2016 Brexit decision have also contributed to the UK’s woes and hurt economic progress, leading to slow growth, diminished living standards, and underfunded public services.
The Labour Party, led by Keir Starmer, has criticised the Conservatives for over a decade of economic decline and is positioned as a strong contender, with opinion polls suggesting a potential victory reminiscent of Tony Blair’s win in 2005. As we’re coming closer to the elections, let’s discuss the challenges that the UK is facing, the main parties competing, the key issues shaping voters’ decisions and potential outcomes.
Challenges the new government will need to address
From improving living standards to boosting economic productivity and restoring public services, the new government has a few challenges to address.
Economy: The UK economy has slowed down, with many households struggling with the cost-of-living crisis, exacerbated by inflation which peaked at a record 11.1% 18 months ago. Tom Waters, an associate director at the Institute for Fiscal Studies (IFS), has emphasised the pervasive poor income growth over the past 15 years, affecting all demographics. The Resolution Foundation also noted that real average weekly earnings in 2023 were significantly below pre-2008 financial crisis levels due to weak productivity growth.
The Pound and Brexit: The value of the pound has declined by 14% over the past 14 years, influenced by the Brexit referendum in 2016 and the disastrous “mini” budget by former Prime Minister Liz Truss in 2022. Brexit has led to prolonged uncertainty, reduced investment, and negatively impacted trade, all of which have hit productivity and economic growth.
Housing and home ownership: While real wages have stagnated, house prices have risen, making home ownership unaffordable for many. In 2021, only 62% of households in England owned their homes, down from 68% in 2008/2009, while rental costs now eat up a larger portion of household incomes than in 2010.
The NHS and public services: The National Health Service (NHS) is under significant strain, with waiting lists for non-emergency treatments continuing to increase. Despite Prime Minister Sunak’s promise to reduce these lists, the number of patients waiting for treatments has increased, especially after the COVID-19 pandemic. This has pushed economic inactivity higher and has weighed on public services and the economy.
What are the major political parties and issues shaping the vote?
The major political parties and their candidates include Labour’s Sir Keir Starmer, the Conservatives with incumbent PM Rishi Sunak, Reform UK led by populist Nigel Farage, the Liberal Democrats with Ed Davey, the Greens with Carla Denyer and Adrian Ramsay, and the SNP with John Swinney.
Key issues that will influence voter decisions
The biggest issues for voters are the economy, health care and immigration, and, according to polling from YouGov, Labour seems to be better prepared to handle all three.
Economy: Labour leader Keir Starmer plans to reform the NHS, housing, and the energy sector, funding these initiatives with £7.4 billion in tax increases. The Conservatives have pledged £17 billion in annual tax cuts, including reducing National Insurance contributions, with Sunak focusing on low taxes and business support, while Starmer emphasises substantial public spending to boost services and green job creation.Greens have pledged to introduce a wealth tax on assets above £10m and raise National Insurance for high earners. The Lib Dems have promised to boost economic recovery while Reform UK intend to raise the income tax threshold to £20,000, increase the 40% tax rate threshold to £70,000, eliminate VAT on energy bills, and cut fuel duty by 20p a litre.
Health Services: NHS waiting lists are at record highs, with 7.6 million people waiting for treatment. Labour aims to reduce waiting times with 40,000 additional health appointments weekly and more cancer scanners, while the Conservatives promise to increase the NHS budget, though many view this as insufficient. The Lib Dems have promised to offer free personal care in England and more support for unpaid carers. Greens aim to increase NHS budgets to cut waiting lists and ensure GP and dentist access.The SNPhas also pledged to protect the NHS from privatisation.
Immigration: Immigration is a contentious issue, with 43% of Britons viewing its impact negatively. The Conservatives focus on reducing irregular arrivals and deporting undocumented individuals to Rwanda, a plan facing legal challenges, while Labour intends to scrap the Rwanda plan and reduce net migration without specific details.Reform UK who stands out for its strong anti-immigration stance intends to freeze immigration, halt illegal Channel crossings, and return migrants to France if necessary.
Ukraine: The UK has strongly supported Ukraine since Russia’s 2022 invasion, pledging £12.5 billion in aid, including £7.6 billion in military assistance. Labour promises unwavering support for Ukraine, working to isolate Russia diplomatically, boost Ukraine’s industrial production, and support Ukraine’s NATO membership aspirations.
Gaza and the Israel-Palestine conflict: The conflict in Gaza has sparked widespread UK protests, with over 70% of Britons favouring an immediate ceasefire. Neither the Conservative nor Labour parties have strongly advocated for this, though Labour pledges to recognise a Palestinian state, which has not satisfied all pro-Palestinian voters.
The Green Party has launched their general election campaign addressing the war in Gaza, which they believe could sway Labour voters. They criticise both the current and potential future UK governments for not pushing Israel to adhere to international law, and advocate for a full bilateral ceasefire and suspending arms exports to Israel. The Greens aim to win key seats by appealing to voters disaffected by Labour’s decisions, including the abandonment of a £28 billion green spending pledge and their position on the Middle East conflict.
The outcome of the general election will hinge on these critical issues, shaping the future direction of the UK.
Potential outcomes and their implications on markets and policies
Scenario 1: With a 70+ seat majority, Labour could maintain current macroeconomic policies but faces uncertainty in sectoral regulation and the labour market. The next parliament will inherit challenging public finances, requiring significant fiscal consolidation to meet debt reduction targets, likely involving more tax hikes than spending cuts, depending on Labour’s majority size. A full Budget is expected in the autumn, potentially allowing for slightly higher borrowing for investment compared to Conservative policies.
A credible fiscal policy could allow the Bank of England to lower interest rates from 5.25% to around 4%, boosting business investment. Labour is not expected to make radical changes in EU relations, maintaining current post-Brexit trade agreements without rejoining the single market or customs union.
If Labour secures a sizeable majority (70+ seats), markets are unlikely to move dramatically, as both parties are expected to have a similar fiscal approach. The main concern for debt markets would be changes in fiscal policy, especially moving from the fiscally conservative right to the left.
Scenario 2: If Labour wins with a small majority (say 20-30 seats), markets might worry about tax increases as Labour could be forced to respond to spending demands, resulting in a higher terminal Bank Rate, higher yields and a steeper curve.
Scenario 3: The election outcome may be much different than polls suggest and could see Labour’s lead cut by half with a resulting hung parliament. Such a scenario is likely under-priced in markets.
Labour could lose support to Lib Dems and Greens: Keir Starmer has moved the party to the centre at the risk of alienating some of the party’s more left-wing supporters. He has made a U-turn on a pledge to spend £28 billion per year on a green investment plan, and he has been less critical of Israel. Polls suggest this approach has cost Labour support among 18- to 24-year-olds as they gravitate to smaller parties, including the Liberal Democrats and the Greens. The seat of Bristol Central which is a city with a large number of young, educated voters could be won by the Green party for the first time.
Reform UK could capitalise on discontent among Tory voters: Nigel Farage hopes to take advantage of discontented Conservative voters and rising concern about immigration to win seats in parliament. With Reform’s voter base spread thinly across the country, it could split the right-wing vote across the country and cause the Conservatives to lose more seats to Labour.
FX implications
The impact on Sterling will be determined by a combination of factors such as interest rates, economic growth, current account deficit funding, EU relations, and the overall FX environment. While, it is not expected to be affected due to the unchanged economic outlook, it may be volatile before the 4 July as polling changes. This volatility may increase if opinion polls indicate a hung parliament or small majority for either of the two main political parties. Nonetheless, the pound is not anticipated to be as affected as it was during other recent events including the Scottish Independence referendum, COVID-19 and the European energy price shock.
