Editors’ Note: MarketMinder Europe favours no political party nor any politician. We assess political developments for their potential economic and market impact only.
Hours after the release of February’s inflation report Wednesday—which showed the inflation rate accelerating to 6.2% y/y—UK Chancellor of the Exchequer Rishi Sunak engaged in the semiannual rite of presenting a budget statement to Parliament.[i] When Sunak stepped up to the dispatch box to deliver this Spring Statement, many financial commentators we follow speculated that he may announce timely tax cuts and other measures to help people through a tough stretch of rising living costs.[ii] Yet the new measures were mostly muted, generating criticism from economic observers and fellow politicians in both parties.[iii] In our view, the significance for markets is likely more political than economic—counterintuitively, the disappointing statement may be a sign political uncertainty is falling, which we think is likely to contribute to global political tailwinds as the year rolls on.
For months, financial experts we follow have warned the UK is facing a Cost of Living Crisis.[iv] Not just from consumer price inflation, but also from the forthcoming increase to household energy prices in April, as well as tax hikes that will take effect then. The Office for Budget Responsibility estimates these factors will drop real disposable household income (meaning, after-tax income adjusted for inflation) by -2.2% this year, which would be the biggest hit to living standards since the 1950s.[v] After a fuel relief package introduced in February largely landed with a thud, public pressure for Sunak to do more to ease households’ pain appeared high.
But the Spring Statement largely disappointed most observers we follow.[vi] To help drivers weather rising petrol prices, the fuel duty will drop 5p per litre, which the Royal Automobile Club Foundation estimates will shave a whopping £3 off the cost of filling a typical tank.[vii] To ostensibly help with home heating costs, it slashed taxes on home insulation, heat pumps and solar panels, which seems unlikely to be much help for low-income families—those most likely to be affected by the energy price cap increase.[viii] As for the National Insurance Contribution, Sunak left the hike announced last year in place but raised the income threshold by £3,000.[ix] Income tax thresholds didn’t get the same treatment, so more people will soon move into higher tax bands due to the wage and salary increases that have accompanied higher inflation.[x] However, he did pledge to cut the basic rate of income tax (which applies to incomes between the personal allowance and £50,270) from 20% to 19% in 2024.[xi]
Now, from an economic standpoint, we don’t think this is likely to move the needle. Not to dismiss the hardship for individual families, but we didn’t think the planned tax rises were a large minus for economic growth overall. Therefore, partially offsetting them with small tax cuts is unlikely to have much effect, in our view. Plus, the income tax cut doesn’t take effect for two years. Until then, most people will still pay a bit more in tax—just not quite as much more as they otherwise would have.[xii]
In our view, the political implications here are probably more noteworthy for stocks. We can’t know exactly what Sunak and his boss, Prime Minister Boris Johnson, are thinking, but we don’t think this is the sort of package one would expect if Johnson were still at risk of a leadership challenge. Indeed, sentiment on that front appears to have changed markedly since early January, when the scandal known as Partygate and other grievances had inspired several Conservative Members of Parliament (MPs) to file formal no-confidence letters.[xiii] Sunak and Foreign Secretary Liz Truss were mooted as likely leadership challengers.[xiv] Prediction markets projected an increasingly high likelihood of Johnson being out of a job sometime this year.[xv] After all, if Partygate didn’t get him, the Cost of Living Crisis surely would—that was the reasoning we often encountered.[xvi]
But then Russian President Vladimir Putin invaded Ukraine, and attention shifted. Johnson’s economic response seemingly won some support back, as polls showed a narrowing gap between the Conservatives and Labour.[xvii] Some MPs withdrew their no-confidence letters.[xviii] And from our vantage point, Sunak didn’t play the role of a near-term challenger trying to burnish his popularity and credentials. If you are planning on standing in a leadership contest, in our view, you probably don’t release an economic package that will fall short of most voters’ hopes and expectations. Note, too, that the income tax rate cut will take effect a month before the next general election is due, which we think is rather … convenient timing? Again, we aren’t mind readers, and we haven’t bugged anyone’s office. But in our view, the government is acting like its next main event is a 2024 election, not a snap contest or imminent change in party leadership. That could change. Perhaps the cabinet revolts after Wednesday’s backlash. But for now, we think the questions appear to be settling.
We think this helps stocks not because they prefer a certain party or government—our research shows they don’t—but because we think uncertainty is a drag on markets. As chatter about a leadership challenge fades, political uncertainty clears, which theoretically helps the UK contribute to what we think will be an escalating tailwind later this year. Already, we have seen similar uncertainty vanish in Italy.[xix] South Korea’s election is in the books, with Yoon Suk-yeol winning earlier this month.[xx] Next up is France, which holds presidential elections in April and parliamentary votes in June. Australia will hold its general election on 21 May at the latest. Then we will have the US congressional (midterm) elections in November, which have historically delivered increased gridlock and an aftermath of great returns.[xxi]
It may be hard to fathom now, with the ongoing war in Ukraine and related geopolitical tensions. But as these uncertainty dominoes fall one by one, we think it is likely to help global stocks move past their early-year setbacks and enjoy the (in our view) positive combination of clarity and political gridlock.
[i] Source: FactSet, as of 23/3/2022. Harmonised Consumer Price Index, year-over-year percent change, February 2022. The Consumer Price Index is a government-produced measure of goods and services prices across the economy.
[ii] “Chancellor Rishi Sunak to Deliver Spring Statement Amid Price Pressures,” Staff, BBC News, 23/3/2022.
[iii] “Sunak Says He ‘Can’t Do Everything’ After Spring Statement Criticism,” Aubrey Allegretti, The Guardian, 24/3/2022.
[iv] “The Cost of Living Crisis – Who is Hit by Recent Price Increases?,” Peter Levell and Heidi Karjalainen, Institute for Fiscal Studies, 17/11/2021.
[v] Source: Office for Budget Responsibility, as of 23/3/2022.
[vi] “'Extremely Disappointing’ and ‘Light on Detail’: Business Leaders Criticise Sunak’s Spring Statement,” Ben Chapman, Yahoo! Finance, 23/3/2022.
[vii] RAC Foundation, as of 23/3/2022.
[viii] “Spring Statement 2022 (print),” United Kingdom Government, 23/3/2022.
[x] “UK Workers to Face £20.5bn Hike in Tax Rises as Inflation Soars,” Pedro Goncalves, Yahoo! Finance, 16/3/2022.
[xii] “Spring Statement 2022: What It Means For You,” Hilary Osborne, The Guardian, 23/3/2022.
[xiii] “UK’s Boris Johnson Loses 4 Senior Aides Amid Partygate Scandal,” Staff, Fox News, 3/2/2022.
[xiv] “Boris Johnson Has Fended Off a Leadership Challenge…For Now,” Aubrey Allegretti and Rowena Mason, The Guardian, 6/3/2022
[xv] Source: PredictIt, as of 24/3/2022.
[xvi] “How Boris Johnson Could Fall, or Hang On, as U.K. Prime Minister,” Stephen Castle and Peter Robins, The New York Times, 7/2/2022. Accessed through the Internet Archive.
[xvii] Source: Politico, as of 24/3/2022.
[xviii] “Scottish Tory Leader Withdraws Letter of No Confidence in Boris Johnson,” Jessica Elgot, The Guardian, 10/3/2022.
[xix] “Sergio Mattarella: At 80, Italy President Re-elected on Amid Successor Row,” Staff, BBC News, 29/1/2022.
[xx] “South Korea: Conservative Candidate Yoon Suk-Yeol Elected President,” Staff, BBC News, 10/3/2022.
[xxi] Source: Global Financial Data, Inc., as of 23/3/2022. Statement based on S&P 500 Total Return Index in USD. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
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