Merlin Weekly Macro: A taxonomy of the UK political scene

The swinging wealth pendulum

“I’m intensely relaxed about people getting filthy rich so long as they pay their taxes”. That was the famous quip of Peter Mandelson in 1998 when he was Labour Business Secretary and President of the Board of Trade. That historic intense relaxation about the concept of wealth (so long as you paid your taxes) from Tony Blair’s then centre-left New Labour government shows just how far the political pendulum has swung in quarter of a century. Keir Starmer’s Labour is explicitly preoccupied with the redistribution of wealth; it constantly hammers home the need for “progressive” tax policy and those with “the broadest shoulders paying their fair share”.

The top 1% of income taxpayers in 2024/5 earned 13.3% of total income and paid 28.2% of all income tax; the top 10% earned 35.1% of total income and paid 60.2% of all income tax: the assumption is they should contribute an even greater share, despite 35.6% of the adult population paying no income tax at all. Chancellor Rachel Reeves is under mounting pressure from Labour’s left wing to abandon her commitment not to raise the rates at which income taxes (including National Insurance for employees) and VAT are levied. Even if she is allowed to keep her promise, the practice of freezing tax bands leading to the fiscal dragging of a greater proportion of income taxpayers into higher brackets is a cynical but well-trodden path. It is ominous that this week Keir Starmer refused to rule out taxation rate changes as a means of plugging a new £40-50 billion black hole in the government’s finances.

As we have discussed frequently, new annual ‘wealth’ taxes to sit alongside the existing transaction (e.g. CGT, stamp duty) or event-driven (e.g. IHT, pension) taxes on capital are being contemplated. A parliamentary Early Day Motion for the introduction of Neil Kinnock’s 2% annual tax on personal aggregated assets above a £10 million hurdle has been tabled by Labour backbencher and former Shadow Economic Secretary to the Treasury Richard Burgon; it is supported by 31 MPs, 13 of whom are Labour (and a further six are MPs who were elected as Labour members in 2024 but who have subsequently had the whip removed by Starmer and now sit as independents); as yet no amendments have been tabled, even by the Opposition.

The LibDems and the Greens nationally, the SNP in Scotland, Wales’s Plaid Cymru and all bar the Unionist parties in Northern Ireland, all share Labour’s leftist reductive view of wealth and how best to tax it ostensibly for the greater good: should it be through income, capital, or both and to what extent. Traversing left from the centre-line along the ideological spectrum from socialist (Labour, LibDems, SNP, Plaid), through Marxist (the Greens), the latest addition is the new yet-to-be-named party co-led by former Labour leader Jeremy Corbyn and erstwhile Labour MP Zarah Sultana, now an independent having had the Labour whip withdrawn. With its ambition to “take on the rich and powerful and win” not only does it have Marxist ideologies but also Bolshevik tendencies in its explicit desire to break the Establishment hegemon.

At the last election over 60% of those who voted (turnout was 59.7%, suggesting the other 40.3% were sufficiently disinterested or disillusioned that the outcome was irrelevant to them) supported such left of the centre-line wealth redistribution policies. As the reality of the rising tax burden bites, especially among middle-income earners and private business owners who voted Labour, it would not be surprising to see at least some lose faith as the scales fall from their eyes.

2029: possibly the least predictable election in years

Although still four years away, the battle lines for the next election are already being drawn. In contrast to the 2024 election result never being in any doubt (it was merely a question of the scale of the Tory defeat, ranging from moderate to annihilated), at this distance thanks to our binary first-past-the-post system 2029 is shaping up to be one of the least predictable in many years. The landscape is changing and polarising politically.

The Tories remain lost at sea: rudderless and drifting, they are in urgent need of a new direction to avoid a terminal collision with the rocks; looking towards the sunset, Kemi Badenoch seems to think Argentina is a good idea. The LibDems have a solid core constituency but with an over-reliance on gimmicks and water sport tom-foolery to win votes, however much they might cause peripheral support to leech away from Labour and the Conservatives, they seem unlikely to make the big national break-through that would give them the power to govern for the first time in more than a century.

The spotlight is shining on the disruptive forces attacking Labour. The Greens (consistently polling around 10% nationally) have been steadily chipping away over the years. The phenomenon that is Reform (currently polling 30% nationally), heavily reliant on the star appeal of Nigel Farage, a mongrel party with equally radical right and left-wing policies that has done for the Conservatives and is turning its guns on Starmer’s party, mimicking Trump’s appeal to the nationalist blue-collar, working-class caucus. Now, directly from within, the threat from the disaffected far Left, the Bolshevik Corbynistas (to give the party a name for which it is searching) who Corbyn alleges already boast up to 600,000 registered supporters. Many of these were his former backers under his ‘Momentum’ banner in 2015 when he won the Labour leadership.

The phenomenon of the current UK national political scene is one that would have been difficult to envisage a year ago in the aftermath of the 2024 election and Labour’s extraordinary nominal landslide (a majority of 174 seats but based on only 20% of the electorate casting a vote for Labour: the “Loveless Landslide”). Keir Starmer’s government has shown considerable ineptitude managing the country’s finances, having expressly promised to restore financial order. A year ago, Rachel Reeves was disturbed to have found an alleged “£20 billion black hole” inherited from the Tories (there was no smoking gun: under open book accounting as required by the Public Accounts Committee, the National Audit Office and the Office for Budget Responsibility, the evidence was all there if those searching were sufficiently diligent to turn over all the stones and find what was underneath). By the time of the Budget in October 2024, that potential deficit had been doubled. When we got to the March 2025 Spending Review, even if many others including us could not see how, Reeves was convinced that the finances were sufficiently back on track that she could dispense largesse particularly with long-term capital investment. Only five months later, she is peering across a yawning chasm of up to £50 billion dividing her income receipts and her outgoings with no easy way of bridging it. To ram home the point, consider the essentials: already to have the highest tax burden outside wartime and outstanding debt as great as the size of the economy but the debt growing faster than economic activity, and a new unplanned £50 billion deficit on top of the 4.8% of GDP that already exists, is quite some feat of financial engineering.

While Labour has already lost control of its narrative and the government has lost the ability to control its agenda, the political rainmaker is Reform. This despite it having only five MPs against Labour’s 397 (those still with the whip). The Conservatives have 117 whipped MPs and yet Reform is already in a position where convincingly it can pitch itself as the real opposition if not the Official one. Whether Reform can maintain its poll leadership all the way to the election remains to be seen. As for Corbyn’s new outfit, apart possibly from among the group of a dozen or so MPs who have had the whip removed by Starmer for disloyalty, it is very difficult to see why any other Labour MPs would defect. However much they might dislike Starmer, the fact is Labour is the party of government. After the Great Benefits Reform Bill Surrender in June, Labour back benchers are in the driving seat when it comes to determining public spending and are just about to flex their muscles on taxation policy. Why give that up for life on the fringes?

Challenging norms and prejudices

Four factors are shaping up to determine the 2029 electoral outcome. It may be one of the few elections in living memory in which the National Health Service is not one of the decisive themes.

• Immigration: it is not our business to be offering views on such a politically charged subject and judging the moral rights and wrongs of individual parties’ approaches towards illegal migration. However, the OBR makes assumptions about the net effects of legal migration in its forecasting, essentially distilled down to economic utility against the cost of providing benefits and the net result on total productivity. The OBR models various net migration rates when balancing the need to maintain the workforce for economic growth when a rising percentage of the national adult population is economically inactive by choice or incapable of work. It is not difficult for sympathetic politicians to infer from the OBR’s work that it thinks net immigration is needed to maintain economic progress, if only to allow them to duck confronting Britain’s chronic productivity gap. However, it is a statement of the obvious that with immigration being a political hot potato and socially febrile and flammable, it is the dominant factor driving polarisation and populism (both right and left) that is potentially destabilising political outcomes. That uncertainty, and by extension the uncertainty of future policy, adds to the risk premium when evaluating government bonds.
• Palestinian activism: it is difficult to know if this is embedded or transitory. However, it is causing clear division in Labour and support for Palestine is a core tenet of Jeremy Corbyn’s new party. Despite Corbyn being convincingly defeated in the 2019 election dominated by Brexit, where the Corbynistas with their strongly pro-Palestinian agenda can create uncertainty is at the election in 2029: their potential to undermine the Labour vote especially among the Muslim communities in the West Midlands, the urban North-West, west Yorkshire and the outer-London fringes is considerable. The evidence is already there: in 2024 senior prospective cabinet minister Jonathan Ashworth was defeated by a pro-Palestinian independent candidate in Leicester South; Wes Streeting, the Health Secretary, only narrowly won his seat in Ilford North with a majority of 528, nearly beaten by another pro-Palestinian independent candidate.
• The politics of envy: covered comprehensively above and in previous columns. Of the national parties so far in the frame, none offers an ideological alternative to the universally prevailing Keynesian Big State tax and spend approach. Only Reform is committed to tax cuts. However, it suffers a deficiency of intellectual rigour in its fiscal planning when growth is its get-out-of-jail card to keep the deficit under control, without which the maths does not add up. Their calculation is reduced verbatim to “Proposals will create 1 - 1.5% extra growth pa; Extra 1% pa GDP = £25 bn; Tax @ 40% spend = £10 bn; Total Extra Growth Assumption = £10 billion pa of extra tax revenues; TOTAL SAVINGS and EXTRA GROWTH POTENTIAL = £160 BILLION PA”; it needs deeper thought than this to be convincing. As for the Conservatives, it was their social democrat Keynesian fiscal approach which created today’s simultaneous historically high tax and debt burdens; there is no formed opinion yet in evidence to suggest any redress. No party is suggesting full-scale reform of the public sector (i.e. doing things very differently rather than merely more or slightly less of the same) let alone having a credible plan that is evident.
• Power to the youth: under government proposals, 1.6 million 16 & 17 year-olds will be enfranchised. In context, at the 2024 election 46.115 million voters were on the electoral roll. Given the novelty of the policy, and at 4 years’ distance (the 16–17-year-olds eligible to vote in 2029 are currently aged 12-13!), who knows what is likely to happen. As an unreliable guide YouGov points to today’s 18–24-year-olds voting predominantly for Labour (28%), followed by the Greens (26%), LibDems (20%) with the Tories and Reform trailing at 9% and 7% respectively. Corbyn’s appeal to the youth movement is strong (think “Yo! Jeremy Corbyn!” at Glastonbury in 2017 when he whipped the crowd to a frenzy). Really, any supposition in this area is pure guess-work but expanding enfranchisement adds another twist to an already less predictable electoral outcome.
  

The investment perspective

Politics, fiscal and monetary policy are inextricably intertwined. The decision of the Bank of England this week to shave another quarter point off interest rates is a good example: despite inflation in danger of heading close to double the 2% target, the Bank sees a stuttering economy as a priority; specifically cited was the jobs market and the decline arising from the big rise in employers’ National Insurance at the 2024 Budget. In the US, as we described last week, the White House and the independent Federal Reserve are enjoying/enduring open mutual hostilities.

Where these tensions meet, mostly it is expressed through term and risk premia in bond pricing, and can be a barometer of sentiment for currencies. As for the individual, it is not just about investment risk, it is about household economics and financial wellbeing: am I better off and if not, am I being taken for a ride.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each.  With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.