MFN - All change in the UK: massive Labour gains despite limited vote share

Today is a momentous day. It is not just that for the first time in 14 years the UK will have a government led by the Labour Party, but also that the scale of the victory is unusual. While the results have yet to be finalised, according to exit polls and results so far it looks as if the Labour Party will have won the most seats of any single party since at least the last Blair victory in 2001.¹ Out of 650 MPs, around 410 are expected to be affiliated with the Labour Party. In this Macro Flash Note, Daniel Murray shares his thoughts, offering perspective on the outcome and its implications.

Source: BBC and EFGAM. Data as at 05 July 2024.

• Given the polls in the lead up to the election, the result was never in question. All that remained to be determined was the size of the majority, which will be massive.
• However, at less than 40%, the Labour share of the vote was relatively low and the forecast number of seats is at the bottom end of the range of estimates ahead of the election. Furthermore, with relatively low turnout and despite the large Labour majority in the House of Commons, the election result appears to be more about chastising the Tories than the country fully getting behind the Labour Party.
• The Conservative Party is facing an existential crisis with likely the lowest number of seats in over a century. The last time we saw such shift in electoral preference in the early 20th century, it heralded the beginning of a prolonged period in the political wilderness for the Liberal Party. Conservative Party leadership now has some serious soul searching to do. They will almost certainly have a long time in opposition to do it.
• Nonetheless, if Tory grandees want to pull something positive from this election it would be that the result is better than many had feared and at the higher end of the range of estimates ahead of the election.
• A challenge for the Tories was that the Reform Party surged in the polls, splitting the right-wing vote. On his eighth attempt, Nigel Farage finally won a seat in the House of Commons. The ghost of Brexit remains ever present. 
• It is notable and perhaps ironic that the UK is moving in the opposite direction to the EU in several dimensions:
  •  Just as the EU is moving definitively to the right in terms of political alignment, so the UK has elected a left-wing government.
  • While the EU is now less stable given the recent success of more extremist parties in European Parliament and national elections, the UK has moved into a much more stable political situation given the size of the Labour Party’s majority.
  • In association with the shift towards parties with more extreme views in the EU, so too has there been an increase in anti-EU sentiment. In contrast, the Labour Party has indicated that it will adopt more friendly overtures to the EU, seeking to repair some of the damage caused by Brexit.
• Historically, Labour governments have been viewed negatively by markets as they have been associated with high taxes and high spending. However, this Labour Party has pledged not to raise the main taxes (income tax, national insurance, VAT and corporation tax). In addition, if the new government is successful in developing closer relations with the EU, that would likely be a good thing for UK businesses.
• However, questions remain regarding how the Labour Party will fund its proposed policies. There will likely be an autumn budget that will shed some light on the direction of travel in that regard.
• A separate matter relates to accountability: with such a large mandate, the Labour Party will dominate the legislative agenda with little challenge. It remains to be seen if the leadership will abuse this privilege or use it in good faith to the country’s advantage.
• Overall, this is a relatively pleasing result for markets: there will be a high degree of political stability, with no major tax changes anticipated and prospective benefits from closer links to the EU. There is potential for a fresh approach that could reinvigorate the UK after what has been a very disappointing few years, politically, economically and in terms of its international standing.

¹ https://researchbriefings.files.parliament.uk/documents/CBP-7529/CBP-7529.pdf

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