The Government was made hopeful by the announced drop in inflation to 2.3% – its lowest level in almost 3 years – albeit still above the Bank of England target of 2%. On 12 June, the Office of National Statistics then proceeded to dampen spirits by publishing data showing the UK economy had stalled in April.
Since then, election campaigning has been steadily underway with three televised leaders' debates and each of the major parties' manifestos now announced. The Prime Minister has steadfastly remarked during the campaign that the UK has a choice between himself and Keir Starmer – with that in mind we've put together a snapshot of what Labour and the Tories are committing to in their respective manifesto specifically in relation to the economy, taxes, energy and the environment.
The Economy, Tax and Pensions
At the start of the year Barclays CEO C.S. Venkatakrishnan described the difference in economic policies between the Tories and Labour as “fairly minimal”. In terms of the manifestos, for the Conservatives, cutting taxes has been the pitch for Sunak, whilst Starmer's Labour's message is one of wealth creation and economic growth.
One could argue that the Conservatives have been prompted to commit to more dramatic tax cuts in their manifesto because they are lagging in the polls. They have promised around £17 billion per year in tax cuts, funded chiefly by £12 billion reform (reductions) in welfare, scaling back in the civil service and a crackdown on tax avoidance and evasion. The Institute of Fiscal Studies have expressed widespread scepticism noting that the cuts are “definite giveaways paid for by uncertain, unspecific and apparently victimless savings”. The Conservatives are promising no increases to income tax or VAT, corporation tax, capital gains tax, stamp duty land tax or any tax on pension savings.
Meanwhile, Labour have arguably looked to avoid rocking the proverbial boat, worrying that this may risk jeopardising their safe polling lead, instead adopting a more cautious approach than they would otherwise do. With limited pledges to spend, the policies depend on Labour's central premise – growing the economy.
They've pledged to raise £8.5 billion through tax increases – a similar crackdown on tax avoidance, changes to private equity carried interest rules, VAT on private school fees and a windfall tax on oil and gas companies – and to borrow a further £3.5 billion. As with the Conservatives, Labour's manifesto is similarly characterised by what they have said they will not do. Namely: no rise in national debt rising, no increases in taxes on working people – income tax and national insurance and no increases in VAT or corporation tax.
Labour have also stepped back, in their manifesto at least, from previously touted policies like reinstating the Lifetime Allowance for pensions, and a simplification of the ISA landscape.
The Similar
- Triple Lock – Maintain the triple lock on state pensions (increasing every year in line with inflation, average earnings or 2.5% – whichever is highest);
- Non-doms – Reform the taxation of overseas income of non-doms – albeit that each party has a different approach on the scope of these reforms and the timings.
Comment: Labour accuse the Conservative's proposal to abolish the non-dom status as being riddled with loopholes. They say that the Conservatives would continue to allow the use of offshore trusts to protect non-domiciled residents from paying inheritance tax on foreign assets. Since that proposal was made in the March Budget it has already been a source of consternation for wealthy non-doms in the UK.
Depending on the details of the impending crackdown, we expect to see wealthy individuals restructure their affairs by moving interests to friendlier low-tax jurisdictions like Italy (who have a flat tax for their equivalent regime). Whatever happens, it is clear that care must be taken to ensure that the closure of existing allowances and exemptions do not catch you off-guard.
- Income, Capital Gains, Corporation Tax – Not increase rates of income tax, capital gains tax or corporation tax (and maintain adoption of full expensing, i.e. allowing companies to claim 100% deduction for capital expenditure in the year incurred).
Comment: Labour have not expressly ruled out increasing capital gains tax, as they have with the other taxes. In a manifesto which has left little wiggle room for additional spending, this is one area where a Labour government could consider reforms should the economic growth their plans are otherwise reliant on fail to materialise. Additionally, whilst increases to the rates of income tax or national insurance are ruled out, neither party has suggested it will reverse the freezing of the income tax and national insurance thresholds which will mean effectively more tax paid by individuals when inflation and wage growth are accounted for.
The Different
The Conservatives are proposing:
- National Insurance – Abolish national insurance for the self-employed and a further 2% cut to national insurance for employees by 2027 with a long-term plan to abolish it entirely.
- Stamp Duty Land Tax – will be abolished entirely for first-time buyers of homes in England and Northern Ireland up to £425,000.
- Retaining incentives for small businesses – including EIS, SEIS, Venture Capital Trusts, BADR and more (Labour are silent on these).
Labour are proposing:
- Private Schools – To abolish the VAT and business rates exemption for private schools;
Comment: It is reported that panicked school heads are rushing parents into paying for their children's fees up-front so as to avoid the VAT hike. Caution should be taken, as these schemes are as yet untested and there is a significant risk that VAT will remain payable in the future.
- Business Rates – proposed replacement of the business rates regime to limit the discrepancy between the high street and online retailers.
- SDLT Surcharge – Raising the existing stamp duty surcharge on overseas buyers of residential property by 1% (currently 2% in England and Northern Ireland); and
- Private Equity Carried Interest – Changing the treatment of carried interest received by private equity fund managers to be taxed as income (making the UK a potential outlier compared to other jurisdictions).
Comment: Carried interest is currently taxed as a capital gain, attracting a rate of 28%, rather than the applicable income rate. Labour's manifesto is scarce on details, so we will be keenly watching for any potential unintended consequences affecting our fund/institutional clients when further information is made available.
- British Business Bank Reforms – to encourage wider regional focus and increase flexibility to fund SMEs.
Energy and the Environment – A tale of two parties
If the two parties are fairly aligned on economic policy, they come apart on issues of energy and the environment where the existing Labour proposals, even if significantly watered down from the £28 billion a year plans suggested earlier this year, suggest a marked difference in approach.
The Prime Minister insists that the Conservatives would “prioritise energy security and your family finances over dogma in our approach to net-zero” having backtracked on several environmental commitments during his premiership. The Conservatives have maintained the existing proposal of net zero by 2050 and will continue to issue new oil and gas licences in the North Sea.
Labour, on the other hand, have expressed a strong focus on, and investment in, a green energy transition including:
- Clean Energy – Decarbonisation of the UK grid with clean power only by 2030 (five years earlier than the Conservatives) – achieved by doubling onshore wind, tripling solar, and quadrupling offshore wind;
- Establishing Great British Energy – a new publicly owned clean energy company to invest in clean energy and in particular offshore wind;
- North Sea Oil – Raising the windfall taxes on oil and gas producers, with the proceeds re-distributed for green investment;
- National Wealth Fund – a new entity to mix public and private investment in growth, industry and clean energy. The fund will have a target of attracting three pounds of private investment for every one pound of public investment, seeking to invest £7.3bn split into £2.5bn for the steel industry, £1.5bn for new gigafactories to support the automotive industry, £1.8bn in upgrading ports and supply chains, and the remaining £1.5bn in carbon capture and hydrogen; and
- Cleaner Water – A tougher stance on water companies, including in relation to water treatment and sewage.
More than two horses
We should not forget that there are other parties in the race.
The Lib Dems (polling at 10%), the Greens (polling at 6%) have each shared their own manifestos and the newly formed Reform UK (polling at 14%) will launch their “contract with the people” on 17 June.
The Lib Dems have set themselves apart by committing to a return to the European single market – the Tories and Labour are distinctly quiet on Europe, net zero by 2045, and significant increases to public spending funded by a levy on banks and crackdown on tax avoidance.
The Greens are championing a vision of drastic tax increases funding dramatic public spending. They propose to nationalise rail water and energy, net zero by 2040, free university tuition and a new wealth tax to fund a significant chunk.
Reform have indicated they would make a wide array of tax reforms, such as raising the minimum income tax threshold and scrapping business rates for SMEs, radical roll backs of environmental policy including abandoning all carbon emission targets and, above all, tackle “non-essential” immigration.
What's Next?
With a Labour government looking increasingly likely, the explicit emphasis on blending private and public investment into energy and infrastructure, and on economic growth above all should mean plenty of opportunities within the proposed shake-ups to the economy. The ultimate composition of Parliament however remains up in the air.
The polls predict a Labour rout, but with the fringe parties offering more radical policy alternatives there may still be some twists in the tale. A strong majority, as predicted, would certainly be much more likely to encourage market stability and greater confidence for investors and businesses for the course of the next five years. A weak majority alternatively could see Labour reliant on left-wing elements of the party who may exert pressure for more radical policies in return for supporting the mainstream party to fulfil its manifesto promises.
When it comes to tax, it appears that non-doms with interests outside of the UK have the most at stake. With some commentators predicting a dash for friendlier climates, existing structures and arrangements should be regularly reviewed to ensure that tax burdens are optimised. Fund managers should also be cautious as to whether their compensation packages are at risk of further tax hikes. Beyond tax and the economy, there is plenty more on the cards as well in the way of proposed regulatory reform of employment laws and AI, amongst others, which will be of keen interest.
As always, the devil is in the detail. We will be following developments closely after the election in July.
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