This could 'HIRT': Investment Implications of a Labour Government

Rachel Reeves, the next Chancellor (?)

One thing a private investor learns, often the hard way, is to be wary of any consensus that emerges among investment commentators and fund managers.

The latest version of this is the widespread belief among UK fund managers that investors have little to fear from the likely outcome of the July 2024 UK General Election, namely a decisive Labour victory.

As the recent annual report of the CT UK High Income Trust put it: “Whilst the likelihood of a Labour administration often causes concern for investors and volatility in markets, for now at least the messaging from Labour and in particular the Shadow Chancellor has been benign.”

A plea for stability and the policy clarity that is likely to flow from a new government with a majority likely to be well over 100, with a probable decade or more (at least) in power, was a theme at the recent Hill and Smith AGM I attended, with more opportunity than risk being the Chairman’s assessment of the consequences of a Labour victory.

At first glance, there is much to commend such a view. Few could argue that the outgoing Conservative administration has been a model of competence and consistency, with five Prime Ministers in eight years and few substantive legislative achievements. What little remained of a long-standing Conservative Party reputation for economic probity was squandered in the ill-fated six-week tenure of Liz Truss and Kwasi Kwateng.

In so far as Labour has articulated detailed economic and financial policies, growth and investment are the keywords.

What is Labour's approach to financial markets?

An early 2024 policy document, Financing Growth, offers some clues.

The overall tone is redolent of early New Labour - working with financial markets to deliver economic prosperity and greater social opportunity. It’s possible to envisage sectors of the economy such as smaller companies, green transition technologies and industries located in the Midlands and North of England being favoured.

However, even within a seemingly benign policy statement there are hints of what I term the probable ‘HIRT’ to come: Higher Intervention Regulation and Taxation.

HIRT: Higher Intervention Regulation and Taxation

1. Directing pension fund investment into UK companies

There has been growing concern across both Labour and Conservative parties at the low level of institutional investment in UK equities. According to Office for National Statistics data, at the end of 2022 UK pension and insurance funds held only 4.2% of UK listed shares, down from 45.7% in 1997.

Labour's 'Financing Growth' document proposes to “Undertake an in-government pensions and retirement savings review” and introduce an initiative modelled on the French Tibi scheme, channelling capital to UK growth businesses, particularly smaller, high-growth companies that might otherwise struggle to attract investment.

The French scheme seems to have worked well thus far, and this proposal may be well-merited. However the suggested means of implementation signals the likely style of greater government intervention to come under a Labour government, capital allocation by committee:

“Labour will set up an oversight committee to manage the scheme comprised of private investors who will be responsible for drawing up an accredited list of venture capital funds and UK small cap funds, supported by British Patient Capital.”

2. Taking aim at AIM?

What politicians omit to mention is at least as important as what they announce. A striking absence in the 'Financing Growth' document is any mention of London's Alternative Investment Market.

Business Property Relief, and the attendant Inheritance Tax exemption for qualifying AIM-listed companies, must be just one of many investment tax reliefs likely to come under pressure, given the repeated commitments by both Rachel Reeves and Keir Starmer that rates of income tax, National Insurance and VAT will not be increased by a new Labour government. 

Revenue will have to be found elsewhere, and investment reliefs like this are prime targets.

3. What kind of ISA(s)?

'Financing Growth' expresses a commitment to renew individual investors' interest in owning shares:

"Labour will look to deliver a modern ‘Tell Sid’ campaign for retail ownership to highlight the value of British people supporting British businesses"

This may signal a desire to make the Stocks and Shares ISA a British-only ISA. It's not too difficult to imagine a future Chancellor arguing 'why should the British taxpayer subsidise investment in overseas companies'?

Nothing explicit has been stated about the level of future ISA allowances. Indeed the author of a 2023 Resolution Foundation Report calling for the introduction of a lifetime cap of £100,000 on ISAs has been selected as a Labour candidate for a relatively safe seat in Wales.

4. The direction of travel is likely to change, decisively

I'm not suggesting an idea like a £100,000 ISA cap will become Labour policy soon after the election, simply arguing that just as in the 1970s ideas from right of centre think tanks rapidly moved from the fringes to become government policy, so in the late 2020s and early 2030s, the same process is likely from the left. 

Ideas like an ISA lifetime allowance; equalising rates of capital gains tax, dividend tax and income tax; the explicit channelling of capital towards social policy goals could well move from appearing beyond the left wing of what is feasible to part of a new settlement between governments and financial markets.

Not all of this need be negative for UK investors. 

The larger the Labour majority the more emboldened the government may become in navigating towards a rapprochement with the European Union. it's highly likely that re-joining the Single Market and Customs Union will figure in the Labour leadership election to replace Starmer at some point in Labour's probable second or third term. 

Whatever one's views on Britain's exit from the EU, moves to recast that relationship in less antagonistic terms, even if only incremental in the short-term, are likely to be looked on favourably by potential investors (particularly from overseas) into UK equities.

5. Could 2024 be another 1979 or 1997? 

In 1979, as he was about to lose to Margaret Thatcher, the outgoing Prime Minister, James Callaghan observed, "You know there are times, perhaps once every 30 years, when there is a sea-change in politics. It then does not matter what you say or do. There is a shift in what the public wants and what it approves of."

As I write this post on Sunday 9th June 2024, just under a month before the General Election, the Sporting Index Spread Betting Market is implying Labour will win 432 seats out of 650, a majority of over 200.

A victory even only half as decisive is likely to usher in an extended period of Labour government, with policies potentially more radical than commentators currently envisage, particularly if the UK's fiscal position and Labour public expenditure plans require higher taxes, which are likely to be levied on wealth rather than income from employment.

Even if the UK stock market, or parts of it, prosper under a long-term Labour government, it’s unlikely that investors and companies will be able to keep as much of the profits for themselves in the future as they have in the past.

It would be complacent to retain current assumptions regarding the limits of intervention, regulation and taxation.

The 2024 General Election is the first step towards a potentially radical new policy regime for which investors need to prepare.