Financial markets like certainty. They will receive it in the UK on Thursday and are quite calm about it.
The economy is improving, with headline inflation lower than the eurozone and the United States, and we just had an improvement in growth in the first quarter.
All the talk about the UK being the slowest growing major economy in the world is proving to be nonsense. Of course there are problems, but much of the hard work to fix both the economy and the public finances has already been done.
Big companies will always try to get along with whoever runs them, but they have certainly been encouraged by what Keir Starmer and shadow chancellor Rachel Reeves have told them.
It is true that some of the most vocal support has come from people who pay no income tax in Britain, such as Larry Fink, head of the US investment giant BlackRock, who said Starmer had shown “real strength as a moderate”. But right now, for any government seeking private capital to help fund huge investment needs, having New York money on its side is pretty handy.
Double act: Rachel Reeves and Sir Keir Starmer have tried to allay fears about the economy under the Labor government
What does this mean for us, as workers, savers and investors, over the next five years?
There are two things we can say and one we cannot. Economic policy has three pillars: monetary, fiscal and structural. Monetary policy will not change, as the Bank of England maintains its role of setting interest rates and the 2% inflation target has been confirmed.
The big numbers on fiscal policy won’t change either, as the Office for Budget Responsibility will monitor everything the Government does and make sure it is consistent with controlling the deficit. Reeves has confirmed that there will be no significant changes to major taxes, apart from the issue of VAT on school fees.
They will look for other ways to raise revenue, but the main way we will find ourselves paying more tax will be through fiscal drag, as inflation pushes us into higher tax brackets.
They will also try to get the private sector to help finance large investment projects and I just hope they don’t burden future taxpayers with huge bills, as they have done in the past. Fortunately, the OBR is sensible in its efforts to hide future Government liabilities and should put an end to them.
What we know very little about is the Government’s structural policies, that is, what it will do to boost the economy. Starmer has committed the Labor Party to returning economic growth to its long-term trend of 2.5 per cent before 2008, but how? Reeves talked about making planning easier at his Mais Lecture in March. That would certainly help, but beyond that there was a lot of aspiration and little substance.
The promised tougher labor laws will likely hurt growth by making the labor market less flexible. Getting the private sector to partner with Government to increase investment is an important issue, but it wasn’t a huge success with Thames Water, was it? I fear there is a curiously naïve attitude in all governments as to what the private sector can and cannot do. We have not been very good at regulation. I would like to think that our next government can learn from the mistakes of the last 25 years, including those of the Blair and Brown administrations, but it is difficult to be confident.
It is easier to rely on the inherent strengths of the UK economy. The rise in services exports in recent years, now significantly larger than exports of goods, has been astonishing.
We are in the right corner of the global trading market, and that seems to be already being recognised in a revaluation of British markets vis-à-vis global ones.
My guess, therefore, is that holders of most UK assets will have a pretty good few years ahead, with stocks, sterling and property all on the up. The main sector I am concerned about is government bonds.
This government will need to borrow heavily and I would not be very interested in lending to it.