New UK government can claim competence dividend

Loud and Keir. Eight years ago, Britain was reeling from its shock decision to leave European Union. political upheaval and economic uncertainty that followed raised risk premium for investors in country. If opinion polls are correct, voters will on Thursday replace ruling Conservatives, who presided over that turbulent period, with a centrist Labour Party government. As France and United States face unpredictable elections, Britain is beginning to look like a relative haven of stability. That gives Labour leer Keir Starmer chance to cash in a competence dividend.

61-year-old is hoping to make Britain reliable again. Conservatives churned through five prime ministers in eight years, including disastrous six-week premiership of Liz Truss, who demolished what was left of party’s claims to competent economic management. If Starmer secures a majority in parliament and completes a full term in office, he will be first British prime minister in two deces to achieve that previously unremarkable feat.

It’s refore no surprise that Starmer and Rachel Reeves, his likely finance minister, have put economic stability at core of ir manifesto. y see solidity as a key to attracting investment, which y hope will revive growth.

Labour could use some help. Britain’s productivity has lagged or developed economies, while Brexit has introduced new frictions to tring with EU. Covid pandemic pushed public sector debt to 100% of GDP. Schools, hospitals and public transport are suffering from years of underinvestment.

Yet re is no prospect of fully reversing economic damage done by Brexit: Starmer has ruled out rejoining EU’s single market or customs union. Meanwhile, Reeves has pledged to keep public debt under control, while promising not to increase income, corporate and sales taxes. That severely limits her ability to crank up spending.

financial benefits of stability are also hard to pin down. Take yield on 30-year UK government bonds, which briefly spiked to 5% after Truss’s government unveiled its tax-cutting budget in October 2022. This included what Dario Perkins, an economist at TS Lombard, dubbed a “moron risk premium”. Though yield today is only slightly lower at 4.7%, this is largely a function of stubborn UK inflation and future direction of interest rates. A new government cannot quickly change that outlook.

Anor way to measure risk is to compare yields on government bonds. For example, difference between yield on French 10-year sovereign bonds and equivalent German debt has widened since French President Emmanuel Macron last month called a snap parliamentary election. On same metric, gap between 10-year UK and German bonds is narrower than at height of Truss-induced panic, but still wider than before she took office. However, latter comparison is an unreliable guide to any risk premium attached to British gilts. France and Germany share a currency and a central bank; Britain and Germany do not.

On some measures Britain may alrey be enjoying benefits of renewed stability. A business barometer compiled by Lloyds Banking Group has recovered since late 2022 and remains above its long-term average. Business investment, which stalled after referendum in 2016 and plunged during pandemic, has recovered in recent years, helped by generous tax breaks on capital spending introduced by Prime Minister Rishi Sunak’s government.

Starmer might argue that investors are alrey anticipating a change of UK government. Many financiers in City of London are indeed privately optimistic about a change of ministration. y argue that a large majority will help former barrister take long-term decisions and resist pressure from his party to boost spending.

Foreign investors should not expect a free-for-all, however. Though Reeves talks of stimulating investment through partnerships with private sector, former Bank of England economist also favours protecting workers and shoring up economic security. party plans to scrap “non-dom” rules that allow wealthy foreigners to escape tax on ir overseas income. Labour has also been careful not to reveal too much about its programme. Even so, business leers who looked on in growing despair as Conservatives thrashed around in search of a coherent set of economic policies will welcome a more pragmatic approach.

Britain’s embrace of sobriety also contrasts with changes of direction elsewhere. France is facing a period of political and economic upheaval after far-right Rassemblement National led by Marine Le Pen captured more than a third of national vote in first round of parliamentary elections on Sunday. Meanwhile former U.S. President Donald Trump is favourite to return to White House. For first time since Brexit referendum in 2016, Britain may have a government that, by international standards, looks relatively sensible.

Of course, political fortunes can change quickly: when former Prime Minister Boris Johnson won a convincing election victory in 2019, many expected him to rule for a dece. He lasted less than three years. A relatively open economy like United Kingdom is also exposed to economic turmoil elsewhere. If Trump follows through on his threat to impose a blanket 10% tariff on products from rest of world he would hurt Britain, which sends more than a fifth of its exports to United States. Slower growth in France would similarly rebound on its fifth-largest tring partner.

However, in a world where nations and regions compete for investment, image matters. Brexit referendum and political battles that followed me Britain butt of jokes in boardrooms around world. More recently, British CEOs have noticed that country barely featured in international discussions. If voters are now rey to reward a party that promises stability, Britain can hope for a competence dividend. Assuming Starmer wakes up as prime minister on Friday morning, he should be able to claim it.

Context News

Britain will hold a general election on July 4. Opinion polls indicate that voters will end 14 years of Conservative Party-led government and hand power to Labour Party.