Yesterday, as Americans were celebrating Independence Day and broiling in the heat, the United Kingdom (UK) held elections. That the unpopular, ruling Conservative and Unionist Party (Tories) would take a beating was a given. The only thing remaining to be seen was how much of one.
In no uncertain terms, it was a bloodbath for the Tories. They lost 251 seats in Parliament, taking their majority 372 seats down to 121. The biggest winner was the Labour Party, winning 214 seats, taking them to a comfortable majority of 412.
Interestingly, due to the peculiarities of UK elections, Labour only managed to capture 33.8% of the popular vote. This was only slightly more than the 1.6% increase in Labour’s vote from the disastrous 2019 General Elections. However, thanks to a near 20% decrease in Britons voting for the Tories, it was enough.
Obviously, the numbers don’t make sense. Where did the rest of the vote go? By far and away, the right-wing Reform UK party was the biggest gainer in the absolute vote, if not seats in Parliament. After polling at only 2.0% in 2019, Nigel Farage’s party was able to capture 14.3% of those casting ballots yesterday.
Intuitively, Reform UK took precious votes away from the Tories, who, frankly, didn’t deserve them. Therefore, it is safe to say, in my opinion, Labour didn’t win the 2024 General Election as much as the Tories lost it. However, I doubt seriously if new Labour Prime Minister Keir Starmer will publicly admit as much.
Why would he? The way things go in the UK, his party has a very clear mandate to do whatever it wants to do. So much so, I decided to take a look at Labour’s policy platform and “manifesto” to see what America’s biggest ally can expect moving forward from its new overlords.
The Labour Party’s Platform
After perusing the party’s website, I can tell you one thing. Vagueness on big ideas, grand pronouncements and, um, claptrap aren’t unique to the Democrats and Republicans. However, by comparison, Labour seems almost incredibly detailed and focused. Here and here.
Unfortunately, I can’t see much in the way of the party’s manifesto that will seriously abate the UK’s relative economic decline over time. Why? Because there sure seems to be a lot of government involvement in just about every aspect of Labour’s economic plan. More specifically, it seems Labour believes the government will grow the economy by guiding and subsidizing private investment.
To be certain, that can work to a point. However, government interference in the private sector will eventually skew results to the former’s desired end. If this is what the British want, then so be it. It is their country. However, the free flow of capital throughout the economy (and financial system) to its highest and best use will generate superior results. Any government mandate, regulation or nationalized economic sector is an impediment to this…at least as it pertains to economic growth.
According to the manifesto:
“This decline (relative UK economic performance) is rooted in two failures.
First, an inability to accept that a strong economy can only be built on the contribution of every community and every person – the many not the few. Second, a failure to acknowledge that sustainable growth requires government to be a strategic partner with business – that markets must be shaped, not merely served.
We will embrace a new approach to economic management – securonomics – that understands sustainable growth relies on a broad base and resilient foundations. Our approach will depend on a dynamic and strategic state. This does not mean ever-growing government, but it does mean a more active, smarter government that works in partnership with business, trade unions, local leaders, and devolved governments.
Labour will stop the chaos and support business through a stable policy environment – strengthening our economic institutions, and giving investors the certainty they need to fuel growth. Labour will seek involvement from industry, trade unions, and civil society in our plans for growth, so they can contribute to building a stronger economy in all parts of the country. We will strategically use public investment where it can unlock additional private sector investment, create jobs, and provide a return for taxpayers.”
At first blush, that sounds great. Doesn’t it? I mean, Labour is going to pull Britain up by its bootstraps by getting involved in the business decision-making process. It is going to shape the markets. It is going to force the companies and investors to work with “stakeholders” to ensure security, presumably for workers (based on other comments in the document). What’s more, all of this government involvement and stakeholder participation is going to spur private investment.
Hey, what is not to like?
The problem, as I see it, is that politicians have a more difficult time thinking like businesspeople than the other way around. It is hard for the former to envision why companies wouldn’t want to work with trade unions and the bureaucracy in order to make investments for its definition of the common good. However, that isn’t the way the world works. Businesses make their capital decisions based on the best interests of the company. That is to generate a profit for the owners.
Don’t get me wrong. Businesses often make beneficial decisions for the company to the detriment of a local population. Ask anyone who lives in a town where a factory has closed, and the production shifted elsewhere, sometimes to a foreign country. However, should the needs of a few trump the needs of the many? In this case, the local population? For instance, shareholders and the workers in other places.
Further, from where does a living wage come, which is something else the manifesto mentions? It has to come from somewhere.
- From reduced profits, which the owners will try to avoid?
- Reduced benefits for employees to offset the increase in wages, which is both probable and ironic?
- From higher prices for goods and services, which hurt consumers?
- From outsourcing to other jurisdictions, which would hurt the workers the legislation intended to benefit?
- From a reduction in headcount of marginal employees, which would also hurt the workers the legislation intended to benefit?
The list goes on and on. However, the point is simple: businesses are not going to sit numbly idle while the government increasingly mandates the former’s costs and the direction of their investment.
In no uncertain terms, companies are going to do what they feel necessary to generate the desired rate of return. They will not simply say: “okay, you’ve got me.”
Conversely, businesspeople understand politicians crave power, and most will say whatever and do whatever they need to do in order to keep it.
The thing is, the more the government gets involved in business decision-making, the larger it will grow. The larger it grows, the smaller the private sector will be, by definition. The smaller the private sector, the less efficient the distribution of capital, goods and services throughout the economy will be. This will inhibit future innovation the market needs and demands, which will, obviously, inhibit growth.
If that last paragraph weren’t true, if the public sector was indeed a more efficient creator of wealth than the private, the former USSR, North Korea, Venezuela and Cuba would be the wealthiest countries on Earth. As we all know, they aren’t, even if they pride(d) themselves on things like universal healthcare (regardless of how inefficient and lacking), adult literacy rates (even if the population is ignorant of the world around them) and the equitable distribution of necessities (even if there is nothing to buy).
This, then, begs the burning question: would you rather live in country which is poorer, but where wealth and income are more evenly distributed, or one which is wealthy and more unequal?
Of course, the kneejerk answer would be: “I want both the wealth and the equality.” To that, I would counter: “to fulfill that noble aim, the government would be best served by breaking down the barriers and policies which inhibit opportunities at the ground level instead of invading the CFO’s office. After all, people who lack marketable skills and opportunity in the UK probably don’t have BP, GSK, Diageo or Vodafone to blame for it.”
Yep. That about sums it up.
In the end, when the dust settles and the smoke clears, the UK has a new government today, and deservedly so. The Tories’ performance over the last decade has been dreadful, and they deserved to be beaten. However, in winning a majority in Parliament, Labour needs to understand it comes nowhere close to a majority in the popular opinion.
As a result, it needs to be very hesitant to embark upon the crusade it outlined in its manifesto, which is long on feel good and short on economic practicality. If it does so, it can only hope to do as well as the Tories have done, which will all but ensure its defeat in the 2029 General Election.
Have a great weekend.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.