New UK government can claim competence dividend
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Peter Thal Larsen
LONDON, July 2 (Reuters Breakingviews) -Eight years ago, Britain was reeling from its shock decision to leave the European Union. The political upheaval and economic uncertainty that followed raised the risk premium for investors in the country. If opinion polls are correct, voters will on Thursday replace the ruling Conservatives, who presided over that turbulent period, with a centrist Labour Party government. As France and the United States face unpredictable elections, Britain is beginning to look like a relative haven of stability. That gives Labour leader Keir Starmer the chance to cash in a competence dividend.
The 61-year-old is hoping to make Britain reliable again. The Conservatives churned through five prime ministers in eight years, including the disastrous six-week premiership of Liz Truss, who demolished what was left of the party’s claims to competent economic management. If Starmer secures a majority in parliament and completes a full term in office, he will be the first British prime minister in two decades to achieve that previously unremarkable feat.
It’s therefore no surprise that Starmer and Rachel Reeves, his likely finance minister, have put economic stability at the core of their manifesto. They see solidity as a key to attracting investment, which they hope will revive growth.
Labour could use some help. Britain’s productivity has lagged other developed economies, while Brexit has introduced new frictions to trading with the EU. The Covid pandemic pushed public sector debt to 100% of GDP. Schools, hospitals and public transport are suffering from years of underinvestment.
Yet there is no prospect of fully reversing the economic damage done by Brexit: Starmer has ruled out rejoining the EU’s single market or customs union. Meanwhile, Reeves has pledged to keep public debt under control, while promising not to increase income, corporate and sales taxes. That severely limits her ability to crank up spending.
The financial benefits of stability are also hard to pin down. Take the yield on 30-year UK government bonds, which briefly spiked to 5% after Truss’s government unveiled its tax-cutting budget in October 2022. This included what Dario Perkins, an economist at TS Lombard, dubbed a “moron risk premium”. Though the yield today is only slightly lower at 4.7%, this is largely a function of stubborn UK inflation and the future direction of interest rates. A new government cannot quickly change that outlook.
Another way to measure risk is to compare yields on government bonds. For example, the difference between the yield on French 10-year sovereign bonds and equivalent German debt has widened since French President Emmanuel Macron last month called a snap parliamentary election. On the same metric, the gap between 10-year UK and German bonds is narrower than at the height of the Truss-induced panic, but still wider than before she took office. However, the latter comparison is an unreliable guide to any risk premium attached to British gilts. France and Germany share a currency and a central bank; Britain and Germany do not.
On some measures Britain may already be enjoying the benefits of renewed stability. A business barometer compiled by Lloyds Banking Group has recovered since late 2022 and remains above its long-term average. Business investment, which stalled after the referendum in 2016 and plunged during the pandemic, has recovered in recent years, helped by generous tax breaks on capital spending introduced by Prime Minister Rishi Sunak’s government.
Starmer might argue that investors are already anticipating a change of UK government. Many financiers in the City of London are indeed privately optimistic about a change of administration. They argue that a large majority will help the former barrister take long-term decisions and resist pressure from his party to boost spending.
Foreign investors should not expect a free-for-all, however. Though Reeves talks of stimulating investment through partnerships with the private sector, the former Bank of England economist also favours protecting workers and shoring up economic security. The party plans to scrap the “non-dom” rules that allow wealthy foreigners to escape tax on their overseas income. Labour has also been careful not to reveal too much about its programme. Even so, business leaders who looked on in growing despair as the Conservatives thrashed around in search of a coherent set of economic policies will welcome a more pragmatic approach.
Britain’s embrace of sobriety also contrasts with changes of direction elsewhere. France is facing a period of political and economic upheaval after the far-right Rassemblement National led by Marine Le Pen captured more than a third of the national vote in the first round of parliamentary elections on Sunday. Meanwhile former U.S. President Donald Trump is the favourite to return to the White House. For the first time since the Brexit referendum in 2016, Britain may have a government that, by international standards, looks relatively sensible.
Of course, political fortunes can change quickly: when former Prime Minister Boris Johnson won a convincing election victory in 2019, many expected him to rule for a decade. He lasted less than three years. A relatively open economy like the United Kingdom is also exposed to economic turmoil elsewhere. If Trump follows through on his threat to impose a blanket 10% tariff on products from the rest of the world he would hurt Britain, which sends more than a fifth of its exports to the United States. Slower growth in France would similarly rebound on its fifth-largest trading partner.
However, in a world where nations and regions compete for investment, image matters. The Brexit referendum and the political battles that followed made Britain the butt of jokes in boardrooms around the world. More recently, British CEOs have noticed that the country barely featured in international discussions. If voters are now ready to reward a party that promises stability, Britain can hope for a competence dividend. Assuming Starmer wakes up as prime minister on Friday morning, he should be able to claim it.
Follow @peter_tl on X
CONTEXT NEWS
Britain will hold a general election on July 4. Opinion polls indicate that voters will end 14 years of Conservative Party-led government and hand power to the Labour Party.
Graphic: Yields on 30-year UK government bonds remain high https://reut.rs/3W30XLf
Graphic: Political upheaval affects government bond spreads https://reut.rs/45OUarZ
Graphic: UK business investment stalled after the Brexit vote https://reut.rs/3RQGUNL
Editing by Francesco Guerrera and Oliver Taslic
면책조항: XM Group 회사는 체결 전용 서비스와 온라인 거래 플랫폼에 대한 접근을 제공하여, 개인이 웹사이트에서 또는 웹사이트를 통해 이용 가능한 콘텐츠를 보거나 사용할 수 있도록 허용합니다. 이에 대해 변경하거나 확장할 의도는 없습니다. 이러한 접근 및 사용에는 다음 사항이 항상 적용됩니다: (i) 이용 약관, (ii) 위험 경고, (iii) 완전 면책조항. 따라서, 이러한 콘텐츠는 일반적인 정보에 불과합니다. 특히, 온라인 거래 플랫폼의 콘텐츠는 금융 시장에서의 거래에 대한 권유나 제안이 아닙니다. 금융 시장에서의 거래는 자본에 상당한 위험을 수반합니다.
온라인 거래 플랫폼에 공개된 모든 자료는 교육/정보 목적으로만 제공되며, 금융, 투자세 또는 거래 조언 및 권고, 거래 가격 기록, 금융 상품 또는 원치 않는 금융 프로모션의 거래 제안 또는 권유를 포함하지 않으며, 포함해서도 안됩니다.
이 웹사이트에 포함된 모든 의견, 뉴스, 리서치, 분석, 가격, 기타 정보 또는 제3자 사이트에 대한 링크와 같이 XM이 준비하는 콘텐츠 뿐만 아니라, 제3자 콘텐츠는 일반 시장 논평으로서 "현재" 기준으로 제공되며, 투자 조언으로 여겨지지 않습니다. 모든 콘텐츠가 투자 리서치로 해석되는 경우, 투자 리서치의 독립성을 촉진하기 위해 고안된 법적 요건에 따라 콘텐츠가 의도되지 않았으며, 준비되지 않았다는 점을 인지하고 동의해야 합니다. 따라서, 관련 법률 및 규정에 따른 마케팅 커뮤니케이션이라고 간주됩니다. 여기에서 접근할 수 있는 앞서 언급한 정보에 대한 비독립 투자 리서치 및 위험 경고 알림을 읽고, 이해하시기 바랍니다.
