Merlin Weekly Macro: Labour’s promises in tatters

“The grown-ups are back in charge”. Keir Starmer’s new Labour government was going to go through Westminster politics and the British Establishment like a dose of salts. It would sweep away the “chaos” of the previous 14 years presided over by the incompetent Tories. It would chart a new course of sound, competent politics and change. Further, in delivering change and supporting “working people”, it promised to tread lightly on the toes of the electorate.

A Prime Minister under pressure 

As Labour prepares for its second party conference in this parliament and only 14 months into taking up the reins of government, who could have foreseen that such lofty but simple ambitions would already lie in tatters? Not just that, amid factional infighting a vocal and growing church within Labour would already be contemplating dumping Starmer as leader and Prime Minister? Yet that is where they find themselves. It was one of Napoleon’s dictums, “Give me lucky generals”: Starmer is not only not lucky, but he is also hapless, indecisive and has questionable judgement. He does not exude confidence. In short, he lacks most of the basic qualities of leadership. As Lord (Charles) Moore wryly observes, Starmer isn’t much good at politics because he does not enjoy it: he’s in the wrong job. They might have known that when they voted him to succeed Jeremy Corbyn.

Starmer set course confidently enough last year; and so he should, armed as he was with a 174-seat majority and an Opposition in disarray. Despite the much heralded launch of “Secureonomics” his and Rachel Reeves’s October 2024 Budget was a largely unforced error, picking a fight with pensioners, farmers and business while giving unconditional recompense to the public sector with hefty wage rises. Already on the back foot politically, in December he felt it necessary for Re-set #1 with his five new priorities (kickstarting growth; reducing NHS backlogs; more policing; children being “school-ready”; delivering clean energy).

With things going from bad to worse and urgently needing to regain the political narrative in the face of a Reform Party whose polls were a chart breakout while Labour’s were plummeting, and having lost almost the entire substance of his Welfare Reform bill in May, early September saw Reset #2 to try and wrest back control: the appointment of new key economic policy advisers in both Nos 10 and 11. It was promptly derailed by sequential political disasters: Angela Rayner’s inability to manage her tax affairs and her choosing to ignore official guidance to seek professional advice, then Peter Mandelson suffering the third road crash of his political life, falling foul of his own poor judgement; Starmer emerged damaged by both incidents. Today there is open sedition in the ranks. Greater Manchester Labour Mayor Andy Burnham is very obviously on manoeuvres for a Westminster comeback but this time as PM, and already in cahoots with Rayner as a potential running mate despite her being banished to the back benches to do penance for her tax “miscalculations”.

Starmer is in a pickle: even if he is not subject to a direct challenge (under Labour’s leadership rules, unseating the Party leader is more difficult than in the Conservative Party), his authority is significantly undermined. He has a big job to do at the party conference in Liverpool to restore his own credibility.

When in glass houses it is careless to throw stones: when the Tories were making an unfortunate habit of regular casual political regicide, defenestrating three of their own prime ministers in quick succession as well as David Cameron resigning having lost his own Brexit Referendum, it was Labour who led the howls of protest that each new appointed successor was illegitimate as he/she had no democratic mandate without a general election. Were Labour to throw Starmer overboard also without an immediate subsequent election, precisely the same mud would stick.

A half-decade of decline

We have discussed in these columns almost ad nauseam the twin problems of deficits and debt. In the UK they remain persistent running sores, symptoms of a deeper malaise: the inability to balance income and expenditure, and to fund long-term capital planning and investment to create an enduring competitive, match-fit economy that is inherently attractive to investors both at home and abroad. The Tories found it as intractable a problem as Labour is finding it to be.

Real UK GDP grew 3.5% in absolute terms adjusted for inflation between 2019-24 (a simple arithmetic average of 0.7% p.a.) The economy collapsed by 10.3% in the main lockdown year of 2020 followed by a sharp recovery of 8.6% in 2021 as trade and society reopened following the introduction of the vaccines. Some progress, even if not much. But that is not the full picture.

We have a chronic productivity problem, summed up in the following table illustrating the half decade either side of the 2020/1 Covid pandemic. 

G7 Countries: Comparative GDP/Capita (Constant US$ as at 2015)

(Source: World Bank)

Confronting hard truths about work

Chancellor Reeves claims to want to engineer growth. But to make sound progress it must be productive growth; that is the only way of increasing long-term resilience, competitiveness and prosperity. A greater proportion of the working age population must be economically active than is the case today (just in the year that Labour has been in office, relaxations to welfare qualification criteria, particularly associated with mental health, have added over a million adults to the existing list of those signed off as sick and unavailable for work: inactive but needing paying for). Additionally, those in employment need to achieve a greater output for the number of hours worked. Simply adding to the public sector employment register and recycling taxpayers’ money is not the answer.

Rising prosperity leads to greater disposable income and the freedom to choose whether to spend, save or invest for the future. Declining prosperity has the opposite effect. But underlying this is a mindset that from an economic standpoint, based on the most recent election results and the economic policies which were presented by the left-of-centre parties in their manifestos (Labour, LibDems, Greens, SNP, Plaid, the Alliance parties and Sinn Fein in N Ireland), the majority of voters either do not share, do not understand or are not prepared to accept.

Uncle Sam knows better

America has many faults. But what it cannot be faulted for is lacking any national spirit of entrepreneurship, risk-taking, business and busy-ness and the desire to “get on”. It champions aspiration; it celebrates wealth and wealth creation; it rewards hard work and has an intolerance of indolence; it is light on regulation. Look at those G7 comparisons above. The result is obvious: at $66.6k per head of GDP the US is not only by a long way (40%) more productive than its nearest rival (the UK), but with a GDP/capita growth rate of over 9% over five years being a third greater than the next (Italy, coming from the lowest base but transforming itself), it is accelerating away, showing the rest of us a clean set of heels. That is especially against the UK, Germany and Canada which in GDP/capita terms are going backwards not only in relative but absolute terms.

It is a truism that from an economic perspective, the invisible centre-line that philosophically divides the right and left in America is well to the right of where it is in Europe. Forty years ago under Margaret Thatcher and Ronald Reagan, the UK and the US were aligned; while the US has remained largely conservative (with a small ‘c’), the UK has drifted markedly leftwards, more in line with Europe.

Cross-roads: left for penury, right for prosperity 

As Rachel Reeves prepares her budget, the wind is in her face politically, economically and fiscally. She deserves no sympathy. But to those advising her, particularly the new appointees who share the radical ideology of taxing assets, stop and ask yourselves: in doggedly pursuing the chimera of fairness and equality, is an outright assault on wealth and capital ultimately in the national interest?

Theirs is an ideology that is perfectly rational in a closed society and a command economy; it does not and cannot work in an open, competitive marketplace where others will simply take advantage of your weakness. You can’t tax your way to prosperity but you can tax your way to penury.

As for the electorate, we have a lot of thinking to do too. Does the state work for us or do we work for the state? Fewer of us appear capable of work or even want to work at all. Go figure.

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.