Labour’s Big Win to Result in Policy Evolution Rather than Revolution in the UK

The Labour Party secured a sweeping victory in the UK general election, returning them to power for the first time since 2010. Although Labour’s share of the vote increased only slightly since 2019 to 34%, the Conservative’s loss of votes to Reform allowed Labour to win 412¹ of the country’s 650-seat parliament. Even so, we expect the market impact to be relatively muted in the near term given this outcome has been expected for an extended period and because Labour will have limited space to enact meaningful fiscal change. As a result, we recommend investors continue to hold UK equities in-line with policy benchmarks.

While the Labour Party have been given a mandate to govern, it is less obvious that they have been granted a mandate for substantial fiscal change, given the cautious manifesto upon which they campaigned. For instance, Labour has committed to two budgetary rules: (1) debt-to-GDP should fall by the fifth year of budgetary forecasts; and (2) the current budget should be in balance on the same time horizon. While the still-vivid memory of the Truss/Kwarteng era fiscal plans is likely enough on its own to inhibit attempts at serious unfunded expenditure, spending will likely be further constrained by the party’s commitment not to raise income tax, national insurance, corporation tax, or VAT. This leaves few other options to raise taxes to finance increased spending.

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