Nothing is ever certain in the world of finance and politics, but as we approach the 4 July general election, opinion polls suggest a change in government may be imminent. This has prompted many people to approach their financial adviser for guidance – reevaluating their finances and investment strategies.
We will now examine the ways in which finance and politics are entwined, future government policies, and how these may impact your finances going forward.
What is the relationship between finance and politics?
Whether considering short, medium, or long-term investments, the economy impacts everything to a certain extent. That’s not to suggest that attractive investments won’t be available during difficult economic times, but it certainly makes running a business more challenging.
Underneath the overarching umbrella of the economy, we have an array of other issues to consider, such as:-
- Taxation
- Regulations
- Monetary policies
- Fiscal policies
Once you begin to dig below the surface, it becomes clearer how closely entwined finance and politics are.
Taxation and personal finances
This is an area in which there has been a significant difference between the Conservatives and Labour historically. The Conservatives are often portrayed as pro-business and constantly looking to reduce taxes, while the Labour Party is often characterised by higher taxes and more investment in public services. However, in recent years, we have seen changes to the stereotypical views of yesteryear.
As we approach polling day, the Labour Party has committed to retaining many of the current government’s existing tax policies if they are handed the keys to number 10 Downing Street. This includes commitments to maintain:-
- Current income tax rates
- The current rate of VAT
These are the primary income providers for the government, along with corporation tax. It is also worth noting that the government’s overall tax take from individuals is now at the highest level in 70 years.
It is also important to realise there is divergence on several issues such as:-
- Private education
- Inheritance tax
- National insurance
- Pensions
If we look at pensions in particular, the Labour Party has suggested it would look to roll back some of the recent regulatory changes. While it is unclear to what degree these changes would be reversed, it is a topic that many people are now discussing with their financial advisers.
Government spending on public services
As government policies on tax and public services depend on the economy, it’s useful to consider economic volatility over the last decade. Since 2014, annual economic growth (measured by GDP) has been as high as 8.7% and as low as -10.4% amid some very challenging times. As recently as the end of 2023, the UK entered a technical recession with two successive quarters of economic decline.
It was a relief to see economic growth for the first three months of 2024 surprise on the upside, hitting 0.6% against consensus expectations of 0.4%. This prompted the IMF to increase its economic forecast for the UK economy in 2024 from 0.5% to 0.7% while retaining a 1.5% forecast for 2025.
An incoming Labour government would be expected to increase spending on public services, but as we have seen with recent Conservative policies, the economy will dictate much of this.
Market reactions and investment strategies
It’s important to appreciate the current situation from a financial and political point of view and how markets have reacted. There is a general belief that stock markets tend to look anywhere from six months onwards with regard to pricing for future scenarios. Ironically, the UK stock market recently hit an all-time high, which suggests that there is less concern today than there has been about an incoming Labour government.
At the moment, whatever party forms the next government, there is limited scope for tax increases or reductions, which has led to considerable overlap in each party’s financial policies. This includes a reduction in the base rate in the short to medium term, better management of inflation, and a target of 2%, which is the Bank of England’s comfort zone.
While the UK market may recently have hit an all-time high, over the last ten years, the FTSE 100 has underperformed many international peers, rising by just 22%. Compare this against the Dow Jones Industrial Average, which was up 75%, and, on a broader basis, the MSCI World Index increased by 98% over the same period. We have seen an increase in mergers and acquisitions activity in recent months, suggesting to some that the UK stock market may offer relative value against its peers.
Long-term economic policies
While the economy will impact all areas of business, there may be some divergence in business policies between the Conservative and Labour parties in areas such as:-
- Financial services
- Technology
- Healthcare
- Energy
Currently, markets do not appear alarmed by the prospect of an incoming Labour government, but it is still important to seek financial advice about your short, medium, and long-term investment strategies.
Conclusion
For many people, the historical economic and business policy differences between the Conservative and Labour parties are less pronounced today. Much of this is a consequence of the prospects for the UK economy and a significant national debt, which limits the potential for any substantial changes in taxation in the short to medium term.
However, we may see some regulatory changes in areas such as pensions, and there is speculation that the energy sector may face a further windfall tax. These are just two examples of issues to be aware of if we see a government change.
Knowing the connection between finance and politics and how these might impact your long-term plans is essential. If you would like to review your investments, or broader finances, in more detail, please feel free to contact us. There may be areas where we can assist with minimising taxation and maximising long-term investment returns, ensuring your finances are best placed for the future.