<\/p>\n
Financial markets proved relatively resilient on the arrival of a new UK Prime Minister in this week. Yesterday, gilt yields were down a touch and sterling held steady. Andy Burnham is the seventh occupant of the office since David Cameron, an unenviable period of political drama.\t \t \t <\/p>\n
\n There is a cautious\u00a0mood among\u00a0wealth and investment
\n managers about\u00a0what new UK Prime Minister Andy Burnham and
\n his colleagues might do on the economy \u2013\u00a0and how much
\n freedom of action they have.
\n<\/p>\n
\n Burnham, who was elected in a by-election to the North
\n West\u00a0constituency of Makerfield in June, and whose return to
\n parliament saw him\u00a0replace an increasingly forlorn and
\n unpopular Sir Keir Starmer, has made tackling rising costs of
\n living a theme in his early pronouncements.
\n<\/p>\n
\n The new premier also\u00a0chose John Healey \u2013\u00a0who resigned
\n as Secretary of State for Defence in June \u2013\u00a0as Chancellor of
\n the Exchequer, aka finance minister. (Burnham removed Rachel
\n Reeves from the post.) Healey had made a point about the need for
\n credible increases in defence spending a reason for standing
\n down, so his appointment to the Treasury will be seen as a sign
\n that the new administration will want to increase defence
\n spending. A question for bond markets is how will the UK afford
\n higher spending on such areas without either hiking taxes and\/or
\n cutting spending in areas such as welfare \u2013\u00a0not an easy
\n choice for a centre-left government.\u00a0
\n<\/p>\n
\n Among early signs of what his government will do, Burnham is to
\n scrap\u00a0VAT on household electricity bills from October.\u00a0
\n<\/p>\n
\n With his denunciations of “neoliberalism” and the privatisation
\n of utilities back in the 1980s, it is expected\u00a0that Burnham
\n will\u00a0increase state control over utilities.\u00a0
\n<\/p>\n
\n Meanwhile, the decision to appoint Healey as Chancellor\u00a0was
\n cautiously welcomed by investors \u2013\u00a0he is seen as a
\n relatively “safe pair of hands” in financial terms.\u00a0Prior to
\n defence, Healey had\u00a0been a Treasury minister in the Blair
\n government. Speculation over possible increases to capital gains
\n tax and the top rate of income tax is also set to intensify,
\n prompting investors to adjust portfolios.<\/p>\n
In a piece of positive news for the incoming Chancellor, UK
\n consumer price inflation dipped to 2.6 per cent in June, falling
\n from 2.8 per cent in May, official figures showed today. Some of
\n the decline was driven by the fall in crude oil prices in June
\n after the US-Iran ceasefire agreement. However, tensions in the
\n Gulf remain and prices have crept upwards since. Brent crude oil
\n \u00a0is trading at $84.92 per barrel as of 09:20 British Summer
\n Time, up 4.83 per cent over the past five trading days. Year to
\n date, it is up 41 per cent.
\n<\/p>\n
\n Here are some reactions from investment managers to the
\n developments in\u00a0the UK government.
\n<\/p>\n
\n Emma Moriarty, portfolio manager, CG Asset
\n Management
\n \u201cThe new PM is walking a fine line. Some of the recent budgets,
\n from Rachel Reeves and [Tory predecessor Jeremy] Hunt, showed
\n that meeting fiscal rules is necessary but not sufficient for
\n gilt markets. At the moment, there”s so much scrutiny of\u00a0the
\n new PM’s fiscal plans, that meeting the rules technically (by
\n borrowing through entities that fall outside the fiscal rules)
\n but not in spirit isn’t going to fool the bond market. The one
\n thing that looks genuinely positive is the PM’s expressed desire
\n to get the welfare bill down. It’s a major political issue but
\n also an increasing fiscal burden. Any effort to get the UK out of
\n being ‘in hock’ to the bond markets has to include material cuts
\n to spending, so it’s good to see that this is being considered
\n too.\u201d
\n<\/p>\n
\n Susannah Streeter, chief investment strategist, Wealth
\n Club
\n \u201cThere has been a cautious welcome from\u00a0markets to John
\n Healey’s appointment as Chancellor, taking control of the UK’s
\n fragile finances. Former defence secretary John Healey was a
\n Treasury minister in Gordon Brown’s government, and there is an
\n expectation that he’ll very much be playing second fiddle to Andy
\n Burnham when it comes to leading economic policy, singing from
\n the same song sheet on decentralisation and backing regional
\n industrial bases. But the immediate focus will be on the military
\n implications of his appointment. Having resigned from government
\n over the lack of a roadmap to meet NATO commitments of defence
\n spending reaching 3 per cent of GDP by 2030, attention will now
\n turn to how quickly he might be able to find more funding to
\n bolster the defence investment plan.
\n<\/p>\n
\n “Shares in military contractors BAE Systems, Rolls Royce, QinetiQ
\n and Melrose were all higher in early trade, indicating investors
\n expect the chancellor will be a bigger backer of defence than his
\n predecessor. There will be cautious optimism to his appointment
\n across the armed services. Having spent months making the case
\n for higher military spending, Healey has a detailed understanding
\n of the capability gaps facing the armed forces and the demands of
\n a far more dangerous geopolitical environment. It comes at a
\n highly timely moment, given reports of live-firing weapons
\n exercises by a Russian warship off the Plymouth coast. The
\n service chiefs are likely to believe they now have a Chancellor
\n who understands their concerns more fully and may be more willing
\n than his predecessor to set out a credible pathway towards
\n spending 3 per cent of GDP on defence.
\n<\/p>\n
\n \u201cHowever, he’s also inherited responsibility for balancing the
\n nation’s books, and the question will be whether he can reconcile
\n his long-standing support for higher military spending with the
\n government’s fiscal rules, which require debt to be falling as a
\n share of the economy by the end of the Parliament. Finding room
\n for defence while also funding infrastructure, social care,
\n employment programmes and measures to boost growth could prove
\n one of the defining challenges of his time at the Treasury.
\n<\/p>\n
\n \u201cIt also puts the question of tax rises back front and centre to
\n fund these demanding requirements, especially with the VAT cut to
\n energy bills, with speculation about increases in capital gains
\n tax and further changes to the top rate of income tax likely to
\n intensify. However, investors should resist the urge to
\n drastically alter portfolios in an attempt to get ahead of
\n potential tax changes. History shows us that rashly switching and
\n ditching assets based on speculation can lead to unnecessary
\n transaction costs, trigger premature tax liabilities and,
\n crucially, miss out on the power of long-term compounding. Timing
\n the market is hugely difficult, and time in the market is what
\n counts most. Nevertheless, it may be worth trimming positions
\n which have performed spectacularly well to lock in gains. For
\n those looking to shelter their portfolios, it is well worth
\n exploring government-backed, tax-efficient life rafts like
\n Venture Capital Trusts (VCTs), the Enterprise Investment Scheme
\n (EIS), and the Seed Enterprise Investment Scheme (SEIS).\u201d
\n<\/p>\n
\n Lizzy Galbraith, senior political
\n economist,\u00a0Aberdeen Investments
\n \u201cHealey\u2019s appointment has not increased market concern about the
\n fiscal outlook, but he raises expectations of further defence
\n spending commitments. He resigned last month after failing to
\n secure a commitment from the government to raise defence spending
\n to 3 per cent of GDP by 2030.
\n<\/p>\n
\n \u201cInitial policy announcements include the removal of VAT from
\n energy bills from 1 October. Spending commitments will bring with
\n them expectations of tax increases at the autumn budget. The
\n government\u2019s claim of the VAT announcement being cost neutral is
\n likely [to be] true in the sense that future borrowing to pay for
\n the government\u2019s scrapped digital ID plan will now shift to
\n funding the VAT cut. And further announcements are expected over
\n the coming week, with speculation of cuts to bus and rail fares.
\n Looking further ahead, Burnham has committed to presenting a
\n 10-year reform programme in the autumn. The budget will cover
\n some of his initial priorities, including welfare reform, defence
\n investment and housing, all large areas of outlay for the
\n government.
\n<\/p>\n
\n \u201cBurnham has indicated that he will seek to maximise
\n `flexibility’\u00a0under the current fiscal rules, likely
\n focusing on ensuring the capital spending rule is used to its
\n full extent. Markets will be closely scrutinising any speculation
\n in the run up to the autumn budget.
\n<\/p>\n
\n \u201cBurnham has indicated cost of living will be his principal
\n focus, but the scope of his early commitments and ambitions is
\n broad and covers some of the most significant areas of government
\n expenditure. Efforts to maximise capital spending under the
\n current fiscal rules are highly likely, but tax rises at the
\n autumn budget seem inevitable.\u201d
\n<\/p>\n
\n Neil Wilson, investor strategist, Saxo UK
\n \u201cThe pound held steady along with gilts after Andy Burnham named
\n John Healey as his chancellor, a surprise move, with his name not
\n part of the conversation until now. His appointment is
\n interesting since he has repeatedly called on the government to
\n raise defence spending to 3 per cent of GDP and resigned from
\n Keir Starmer’s cabinet over this point and backed the idea of war
\n bonds \u2013 new issuance to cover the cost of extra defence spending.
\n After initially selling off yesterday afternoon both gilts and
\n the pound have found some support and are a bit steadier today \u2013
\n but I would reiterate there is growing nervousness in markets
\n about potential.
\n<\/p>\n
\n \u201cAs flagged, this was going to be viewed initially as good for
\n the UK’s defence sector with investors seeing a clear read across
\n from the appointment to a higher defence budget.”\u00a0
\n<\/p>\n
\n Charlotte Kennedy, chartered financial planner at
\n Rathbones
\n \u201cAndy Burnham has started his premiership with a carrot:
\n scrapping VAT on domestic electricity bills from October. But the
\n saving will vary from household to household, depending on
\n factors including energy use, tariffs, property type, energy
\n efficiency and household size. But the bigger question is what
\n will ultimately fund the new government\u2019s `new economic model’.
\n<\/p>\n
\n \u201cBurnham has inherited a difficult economic backdrop: subdued
\n growth, stubbornly high borrowing, a sizeable national debt and
\n rising debt-servicing costs, alongside unresolved questions over
\n how to fund higher defence spending. The arithmetic leaves
\n limited room for manoeuvre. Higher taxes, spending cuts, more
\n borrowing \u2013\u00a0or some combination of the three \u2013\u00a0could
\n all be on the table.
\n<\/p>\n
\n \u201cSo, while the government may want to pursue a different economic
\n strategy, the question is how much more pressure can be placed on
\n the same relatively narrow group of taxpayers. The key issue is
\n not simply whether taxes will rise, but who will ultimately be
\n expected to pay for\u00a0Burnham\u2019s economic agenda \u2013\u00a0and
\n whether those already carrying a disproportionate share of the
\n burden have much more capacity left.\u201d
\n<\/p>\n
\n Tony Whincup, head of investment specialists at
\n TrinityBridge
\n \u201cBurnham\u2019s grand vision \u2013 still sketchy \u2013 will collide with
\n reality as he assumes the weight of office. Whilst we don\u2019t know
\n much about his 10-year plan yet, markets will quickly judge
\n whether new Chancellor Healey is considered market-friendly.
\n Healey presents an immediate fiscal challenge because he quit as
\n Defence Secretary after his predecessor, Rachel Reeves and failed
\n to commit to spending fully 3 per cent of GDP on defence,
\n equivalent to a shortfall of around \u00a310 billion a year.
\n Presumably, fixing this funding gap was a pre-condition of Healey
\n accepting the job. Burnham has told reporters he will use `any
\n flexibility’\u00a0within UK fiscal rules and announced his
\n intention to remove the 5 per cent\u00a0VAT rate on energy bills,
\n reportedly funded this year by scrapping digital ID plans. If
\n costs mount on one side of the ledger tackling defence,
\n homelessness, council houses, energy bills, etc., they\u2019ll need to
\n be offset on the other by cutting spending elsewhere or raising
\n taxes. The next few hours and days will make Burnham\u2019s direction
\n of travel clearer. Tough choices are ahead in the Autumn Budget.\u201d
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