The Spring Statement’s Overlooked Message About UK Politics Today

Editors’ Note: MarketMinder favors 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 CPI 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] While the formal Budget comes out in the autumn, governments have increasingly used the so-called “Spring Statement” as a chance to tweak provisions that attracted criticism months earlier. So when Sunak stepped up to the dispatch box, many expected timely tax cuts and other measures to help people through a tough stretch of rising living costs. Yet the new measures were mostly muted, generating criticism from pundits and fellow politicians in both parties. In our view, the significance for markets is more political than economic—counterintuitively, the disappointing statement may be a sign political uncertainty is falling, which should contribute to global political tailwinds as the year rolls on.

For months, pundits have warned the UK is facing a “Cost of Living Crisis.” 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 by -2.2% this year, which would be the biggest hit to living standards since the 1950s.^[ii] After a fuel relief package introduced in February largely landed with a thud, pressure for Sunak to do more to ease households’ pain was high.

But the Spring Statement largely disappointed most observers. To help drivers weather rising gas prices, the fuel duty will drop 5 pence per liter, which the Royal Automobile Club Foundation estimates will shave a whopping £3 off the cost of filling a typical tank.^[iii] To ostensibly help with home heating costs, it slashed taxes on home insulation, heat pumps and solar panels, which likely won’t be much help for low-income folks in rental properties—those most likely to be affected by the energy price cap increase. As for the National Insurance Contribution, which funds the National Health Service, Sunak left the hike announced last year in place but raised the income threshold by £3,000. Income tax thresholds didn’t get the same treatment, so more people will soon fall into higher tax bands, but he did pledge to cut the “basic rate” (which applies to incomes between the personal allowance and £50,270) from 20% to 19% in 2024.

Now, from an economic standpoint, we don’t think this moves 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 main 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.

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 this isn’t the sort of package one would expect if Johnson were still at risk of a leadership challenge. Indeed, sentiment on that front has 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. Sunak and Foreign Secretary Liz Truss were mooted as likely leadership challengers. Prediction markets projected an increasingly high likelihood of Johnson being out of a job sometime this year. After all, if Partygate didn’t get him, the Cost of Living Crisis surely would—that was the reasoning.

But then Russian “President” Vladimir Putin invaded Ukraine, and attention shifted. Johnson’s economic response seemingly won some support back. Polls showed a narrowing gap between the Conservatives and Labour. Some MPs withdrew their no-confidence letters. 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, 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 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, the questions appear to be settling.

We think this helps stocks not because they prefer a certain party or government—they don’t—but because uncertainty is a drag. As chatter about a leadership challenge fades, political uncertainty clears, which 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. Korea’s election is in the books, with Yoon Suk-yeol winning earlier this month. Next up is France, which holds presidential elections in April and parliamentary votes in June. Australia will hold its general election on May 21 at the latest. Then we will of course have the US midterms, which have historically delivered increased gridlock and an aftermath of great returns.

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, it should help global stocks move past their early-year setbacks and enjoy the bullish combination of clarity and political gridlock.