The UK Election continues to gather pace with TV debates, more opinion polls and the launch of party manifestos. The Conservative Party, Labour Party and Liberal Democratic Party have all emphasised that they will spend more and borrow more. The key differences are in the magnitude of spending and tax policies. We’ll be following the estimates for government borrowing closely, as that can impact longer-term interest rates and inflation.
Opinion polls indicate that the Conservatives are extending their lead over Labour. The Liberal Democratic and Brexit Party appear to be losing momentum. Bookmakers are currently pricing in an outright Tory majority, with the next most likely outcome a hung parliament. We note that opinion polls continue to show around 15% of undecided voters, which could be an important factor come election day.
Markets are not pricing in the risk of a Labour-led government at present. If this occurs, it could lead to heightened volatility in UK asset values. A Labour majority could mean the UK has a closer relationship with the EU. However, it would also bring a dramatically different economic model.
Earlier in the year, we added exposure to the pound and domestically-focused UK companies to client portfolios. We maintain this positioning going into the election although we acknowledge they could be sensitive to the election outcome and hence may require revisiting post the election results. We will update you as and when our opinion evolves.
What can we learn from the manifestos?
Do the manifestos matter to voters? They provide a summary of policies, and which allows for cost assessments and comparisons. Leadership and values may sway voters more than policies, though.
Do the manifestos matter for investors? We don’t expect the manifestos to have an impact on markets. But, they do give us more information about how each party might behave if put in power. That can help us understand how markets might react on 13 December.
From an investor’s point of view, specific policies could mean big changes for sectors and individuals. Here’s what caught our eye in the Conservative, Labour and Liberal Democratic Party manifestos:
Conservative Party Manifesto
Hold a vote on the Withdrawal Agreement Bill before Christmas. Leave the European Union by 31 January 2020 and negotiate a trade agreement with the EU by December 2020. The first two are within the UK government’s power to deliver. We are sceptical that a trade agreement with the EU could be put in place within a year. The EU’s most recent agreement with Canada entailed five years of negotiations, plus another two and a half years to obtain approval from the European Parliament. The manifesto also states a goal of having trade agreements in place with the USA, Australia, New Zealand and Japan within three years.
No increases to income tax or VAT.
Increase the threshold for paying national insurance from £8,628 per year to £9,500 per year. This change would save approximately £100 per year for taxpayers above the new threshold.
Ban the export of plastic waste to non-OECD countries. China accounted for circa two thirds of the UK’s plastic waste exports until the country banned imports of most waste products in January 2018. Since then, the top five destinations for the UK’s plastic waste have been Malaysia, Turkey, Poland, Indonesia and the Netherlands. Some types of plastic can be recycled profitably. It can also be burned, buried or dumped in the ocean—and the risk of that is higher in less developed countries.
Encourage a new market in long-term fixed rates mortgages. The longest fixed rate mortgage in the UK is currently 15 years. Nationwide offered a 25 year mortgage in the 1990s, however demand was limited. Borrowers worried about being locked in and having to pay fees to end the mortgage early. Demand could be higher today, given the low interest rates. Lenders would likely want a government guarantee before offering a 25 year fixed rate mortgage with a small deposit (5-10%).
Allocate £500m per year to fix potholes over the next four years. In July 2019, the UK Parliament’s Transport Committee estimated it would cost £10bn to fix all potholes in the United Kingdom. So, it would be a start.
Labour Party Manifesto
Negotiate a new Brexit deal and hold a referendum on whether to take the new deal or remain within six months.
Increase the minimum wage from £8.21 to £10.
Increase income tax for those with incomes above £80,000. Introduce a new 50% income tax band for those earning over £125,000.
Add VAT to private school fees.
Increase spending on the NHS by 4.6% per year.
Tax capital gains and dividends at the same rates as income. At present, capital gains and dividend tax rates are lower than income tax rates for those with taxable income of more than £50,000 per year. This creates a strong incentive to earn returns through capital gains (often equities) rather than income (often bonds). Investors would no longer have that incentive, and overall tax rates on investment returns would be significantly higher.
Introduce an £11bn windfall tax on oil companies. Companies could respond in several ways to cover this cost; reduced dividends, lower capital spending, or increased borrowing. All three would be negative for shareholders.
Nationalise water and sewage companies, energy supply networks, rail-operating companies and Royal Mail. Investors have been wary of these areas for some time, since it’s unclear how the government would decide what price to pay to shareholders. The Confederation of British Industry (CBI) estimated it would cost £196bn or 9% of Britain’s Gross Domestic Product to nationalise those industries. Usually a company pays a premium to take over another business and the existing shareholders have to consent. A Labour government could take a different approach. Some of the nationalisations, such as utilities, would be expected to take years.
Introduce a broader public interest test to prevent hostile takeovers. The fall in sterling over the past three years has made UK companies attractive acquisition targets for international buyers. Examples include Sky, Inmarsat, and Cobham. Stricter review rules could diminish the appeal of UK companies.
Liberal Democrats Party Manifesto
Revoke Article 50.
Expand free childcare.
Freeze train fares for the next parliament.
Increase all income tax rates by 1% and use the revenue for the NHS and social care. Tax capital gains at the same rates as income. The overall tax rates for those with investments would rise substantially.
Regulate financial services to encourage green investments, including requiring pension funds and managers to show that their portfolio investments are consistent with the Paris Agreement. This has been a major theme recently, as more investment managers seek to vote in company meetings and understand how companies are impacting the climate. Depending on how it’s set up, it could make it difficult for companies in “dirty” areas to access capital.
Green policies: generate 80% of electricity from renewables. Tax frequent flyers. Cut VAT on electric vehicles to 5% and install more charging points. Ensure that by 2030 every new car and small van sold is electric. Automakers have struggled in recent years to adapt to new technology and lower sales growth. Tesla appears to be the leader in electric vehicles right now, but others are investing billions to catch up. Reducing taxes could accelerate electric vehicle sales in the UK.
If you would like to discuss this article further please contact your usual Brown Shipley Adviser.
Shanti Kelemen // Investment Director
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