What Would a Labour Government do to Taxes and Finance?

"Against this backdrop, and absent major surprises, we don't expect the UK election to be a market moving event," says Royal London Asset Management's head of multi-asset Trevor Greetham.

But changes of government are hugely significant for the economy and financial markets, which is not to mention the savers, investors and pensioners who depend on the clarity (or lack thereof) produced in Whitehall.

As such, each party's manifesto will be pored over by policy experts, lobbyists, and savers in a search for signs of major updates to fiscal and monetary policy. Until we see the documents, it's hard to make judgements about which party would be "better" for the UK economy, which has been in a low-growth, high-inflation funk since the pandemic, and is still dealing with the legacy of Brexit.

What's more, a long-standing obsession over taxpayer value and the impact of Liz Truss's so-called mini-Budget now mean manifesto "costings" are a firm part of the UK's political dialogue. There's every sense such documents are as much a stick to beat parties with as they are a call to action or a vision for change.

Labour Says 'We've Changed'. Will it Change Anything?

When Rishi Sunak, who was previously in charge of the UK economy as chancellor, spoke on Wednesday, he immediately cited his track record during the pandemic, and argued that his Labour counterparts had "no plan" for growth.

Handily, this came amid some improved economic conditions: the UK has exited recession, inflation is at 2.3% rather than 11.1%, the jobs market is by-and-large robust, and the stock market is at record levels. Even the International Monetary Fund is expecting a rebound in growth in 2025.

Still, there are big political problems. Sunak is under pressure over the UK's tax burden, which is at its highest since World War Two. British public services are under great strain. Mortgage rates are also at levels last seen during the financial crisis of 2008.

Labour has been working on its response to this for a long time. Much of its approach has been informed by the perceived legacy of Jeremy Corbyn, but there is more to it than that. Long before Corbyn was leader, the Party occasionally struggled to present itself as "pro-business". Little wonder it has already published a blueprint for the City of London, itself a key "constituency" that has traditionally been seen as pro-Tory.

The woman at the centre of this effort is shadow chancellor Rachel Reeves, whose only major gaffe so far appears to have been an incident involving allegations she plagiarised sections of a book she wrote on women economists.

A former Bank of England economist, Reeves has suggested corporation tax would be capped at its current rate of 25%, that she would end the ability of chancellors to scrap fiscal rules, and that the bankers' bonus cap shouldn't be reimposed.

Introduced by the last Labour government as a populist measure after the global financial crisis, banks circumvented the bonus cap by raising basic pay. Dealing with Labour's own legacy here has been tricky, but in the end it's as much about the optics as it is whether the party is actually uncomfortable with people making vast sums in Canary Wharf.

And then there are the UK's boardrooms, which are still male-dominated, still under huge regulatory pressure, and still looking for ways to up profits while contributing to UK economic growth.

At the 2019 election executives took a dim view of talk of wealth taxes and renationalisation. And yet, in the time that has elapsed since, popular discourse has viewed such ideas somewhat more kindly. Just a few short years ago, Tories and the Tory-aligned media were only too eager to call Jeremy Corbyn's renationalisation rhetoric as dangerous and radical.

In 2024, however, we've already heard talk of the ruling Conservative Party renationalising Thames Water, and disquiet (to say the least) over dividend payments to irresponsible bosses is a growing avenue of discussion. Labour may have more wiggle room here than it assumes.

Would a Labour Government Cut Taxes and Fix ISAs?

But none of that is exactly comprehensive. Indeed, you could go as far as saying Labour is still being deliberately vague. One of its few solid commitments has been putting VAT on private school fees. You can't build a government on that alone.

It's already had a PR backlash for diluting plans to spend £28 billion a year on the green industry, but it is sticking with the idea of setting up Great British Energy, a state-run renewable power firm. Oil and gas companies are footing the bill and, like all European governments, Labour will have to get to grips with the climate change transition.

Enter Ed Miliband, himself no stranger to losing elections, who has reprised his former role as secretary of state for energy and climate change (2008-2010) in the shadow cabinet. His current job title is different, as shadow secretary of state for energy security and net zero, but the brief is home turf for a man whose "Ed-Stone" was the dying gasp of Labour's failed attempt at re-election in 2015.

Over in the personal finance space, while we may not see the "British ISA" promised by current chancellor Jeremy Hunt this year (or ever), Labour will be keen not to dismantle too much of the current savings and investing regime too quickly. Still, Rachel Reeves' intray with proposed policy for pensions taxation, savings products, and financial advice, all of which are in need of simplification.

The affordability of the current state pension is an issue governments are keen to avoid talking about, but the nettle will have to be grasped. And the Tories know this. Jeremy Hunt has already said a fresh Tory government would stick with the triple lock after the election, but there is every sense that is just a political grenade being thrown at any potential incoming government of a different colour.

And then there is the tax burden.

High government debt levels mean the next government will have very little wiggle room to cut taxes. As the party of the NHS, Labour will likely find itself in a real bind over health service funding, which is still seen as a bread and butter issue in the opinion polls.

On this, readers with long memories will recall all the wrangling over Gordon Brown's 2002 decision to put 1% on National Insurance contributions to fund a £6 billion uplift in NHS spending. Today the NHS costs the state £180 billion, ambulances don't arrive on time, and GP appointments have to be fought over at the 8am phone call queue. After gilt yields spiked and the pound fell dramatically during the "Trussonomics"mini-Budget debacle, nobody is ignoring what markets may think of policy changes.

What is Labour's Plan For Economic Growth?

With this peculiar and difficult set of circumstances, it's little wonder Reeves is pitching her case for a Labour government with economic growth centre stage.

Without better economic growth, she said at a recent lecture, a Labour government would have to make "impossible" tax and spending decisions. This perhaps makes sense, but it may have wrankled the economists who wanted the shadow chancellor to make a stronger argument for stimulating the economy with government money.

All this means Reeves and Starmer may well move cautiously at first, but that assumes there is a programme for radical change coming later. An alternative theory is a Labour government will not change much at all. After all, the British voter is now used to high taxes and, following the pandemic era of furlough and "helicopter money", a fair amount of government intervention. More of the same may not be particularly controversial. Both parties have been stealing each other's ideas for years anyway.

That aside, decent economic growth won't hurt. But if it wants to do anything with the results, Labour has to put in a good showing first. It's time to see if Keir Starmer's determination to put "power before protest" will pay off at the polls.