A quiet foregone conclusion? Examining the low hype around the 2024 UK general election

Why is there minimal discussion surrounding the upcoming UK election on July 4th, with exit polls expected at 8 p.m. London time?

The answer largely stems from the anticipated predictability of the outcome. According to the Financial Times model, the Labour Party is projected to secure a commanding majority with 459 seats, significantly surpassing the 325 seats required for a majority. Other forecasting models, paint a similar picture.

This forecast starkly contrasts with public voting intentions: only 40.8% of voters reportedly support Labour, while 20.2% back the incumbent Conservatives, 16.1% support Reform, 11% favour the Liberal Democrats, and approximately 6% support the Greens.

The root of this disparity lies in the UK's unique electoral system. Unlike systems based on proportional representation, the UK utilises a plurality system where the candidate with the most votes in each constituency claims the seat, negating all other ballots. This can lead to a substantial mismatch between the national vote share and the distribution of seats across parties, further evidenced by 650 seats in the House of Commons.
 

The current situation makes it hard to implement any fundamental changes

Despite the likelihood of a Labour victory, the UK grapples with formidable challenges. The national debt is the highest in over 60 years, standing at approximately 101.3% of GDP. Tax levels are near historical peaks. Concurrently, public spending has increased, marking the fourth-largest annual increase as a percentage of national income and the highest increase under any Conservative leadership. Public spending amounted to 45.6% of GDP.
 

Public services remain under stress

This surge in spending has not alleviated pressures on public services, which remain stressed. According to a YouGov poll, 84% of Britons say public services are in poor shape.

The health system, schools, train services, police, and prisons need to be in better shape. While the water providers are public, several of the largest providers are nearly bankrupt and suffer from massive wastewater spillages into UK rivers and seas.

Former Prime Minister Liz Truss introduced tax cuts to revitalise the economy in September 2022. This policy, however, resulted in a swift devaluation of the pound and a steep rise in government bond yields. Ten-year bond yields leapt from about 3% to over 4% in just one week, signalling a stark erosion of market confidence.

Consequently, any incoming government is treading with caution regarding significant policy shifts. Labour's agenda primarily concentrates on enhancing NHS services. Still, other proposed reforms, like abolishing the non-domiciled tax status and imposing VAT on private school fees, are projected to have minimal impact on the economy. ('Non-DOM' status in the UK allows some residents to limit the taxes paid on foreign income.)
 

Reform UK could setup a selloff in GBP and UK bonds like Liz Truss

Meanwhile, Reform UK, a smaller political party, has proposed extensive tax reductions and a spending boost of 50 billion pounds. This ambitious financial strategy would ostensibly be supported by a 150 billion-pound package, which includes considerable yet unspecified cuts in welfare and government spending. The lack of detail regarding these cuts and funding sources has led to widespread scepticism.

With no significant parties advocating for a return to the EU Customs Union and Reform UK likely to secure only a tiny fraction of the vote share without gaining significant seats, dramatic changes following the election appear unlikely. This scenario contributes to the subdued focus on the UK elections.
 

Conclusions

Although Reform UK is unlikely to secure a win, if they were to implement their proposed massive tax cuts and increase spending, highest probability is that the markets take this as a chance to a sell-off in the British Pound and UK government bonds.

Conversely, should Labour win, we can expect few, if any, major shifts in the value of the British Pound and the FTSE 100 (UK100). Similarly, significant changes are unlikely under the Conservative leadership, though their chances of winning appear extremely slim at this time."

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