As we discussed in our article on 2024’s elections in Developed Markets, one of the major events of this year’s political landscape is parliamentary elections in the UK. After being in power uninterrupted since 2010, the Tory party now seems on the verge of ceding power to the Labour Party, led by Keir Starmer.
The Conservatives have faced a rollercoaster over the past 15 years. First they had to enter a coalition with the Liberal Democrats led by Nick Clegg, as they did not have a majority in Westminster. Then they faced the Scottish independence referendum in 2014, which was narrowly won. At the end of the coalition parliament, they won the 2015 election with an unexpectedly large majority, which caused more harm than good. Prime Minister David Cameron had promised a referendum on EU participation in case of victory, because he thought that a coalition with the LibDems would be needed to have a majority in parliament as had been the case 5 years prior, and would prevent him from calling any such referendum.
After obtaining a victory with a large majority for the Tory party, Cameron had to make good of his promise, and called the Brexit referendum, which resulted in a victory for the “Leave” camp, in June 2016. Since Cameron had campaigned for the UK to “remain” in the EU, he resigned, and was replaced by Theresa May. She called an election in June 2017, which turned out to be disastrous. Instead of increasing her majority in parliament, she was forced to enter a coalition with Northern Ireland’s DUP party. Her majority wobbled to the point that eventually Boris Johnson replaced her, and led the Tory party to a landslide victory in December 2019, to “get Brexit done.” Johnson himself was destabilised by the Covid crisis, and had to resign in 2023, when he was replaced by Liz Truss, the shortest-serving UK Prime Minister in British history, who caused a bond market rout in the space of 2 months after taking office. She was replaced by Rishi Sunak, Johnson’s Chancellor of the Exchequer, who has never been particularly popular.
Meanwhile, the Labour Party has changed its face, and after shifting massively to the left, and recording the worst defeat since 1935 in 2019, has now moved back to the centre under the leadership of Keir Starmer, and is around 15-20 points ahead of the Tory party in the polls. The Conservatives will announce the budget on March 6th, and are ready to provide some fiscal giveaways such as a reduction in the income tax or a reduction in national insurance contributions. This will be the case even if Chancellor Hunt says that the UK will still need to wait before seeing a substantial easing of its fiscal stance. Press reports suggest that the Tory party is ready to “steal” some of the key policies of the rising Labour Party (such as a reform of the resident, non-domiciled fiscal regime) to finance these fiscal giveaways. Some speculate that a “sweet” budget may pave the way for an early election, possibly in May.
Meanwhile the Bank of England is facing the dilemma of a slowing economy and a persistent inflation rate, which remains at 4%. For this reason, the MPC has recently voted with a three-way split, with some members voting for a hike, while other preferred a cut, with the majority imposing another month of “no change.” The BoE’s Chief Economist Huw Pill said that in his opinion rate cuts are still “some way off.” So, both monetary and fiscal policies cannot be as easy as is desirable, while policy uncertainty and political noise will keep investors wary of UK assets.
