Boring, boring …

One of the more ‘colourful’ habits in the otherwise sensible life of Sir Keir Starmer is that he is an Arsenal supporter, to the extent that he has been quizzed on this in media interviews, and cruelly asked if, like Arsenal, he will ‘bottle’ the premiership. For those non-football fans amongst you, even Arsenal fans like to chant ‘boring, boring..Arsenal’).

Consistent with his devotion to Arsenal, ‘boring, boring’ seems to be the guiding light of Starmer’s policy playbook, launched formally on Thursday in the form of the 23,000-word, 134 page Labour manifesto.

The subset of individuals who peruse political party manifestos is small, and I have heroically dug into it to save readers the trouble. It is worth paying attention to because of the likelihood that Labour will form the next government in the UK.

My first take is that the manifesto is very conservative, with a small ‘c’, in the sense that it emphasises Starmer’s reluctance to change many elements of existing fiscal policy (corporate tax stays at 25% for example) and effectively ventures very little in terms of dramatic policy moves. The headlines stress no ‘austerity’ but it is also hard to see this package producing a durable expansion and return to productivity. The manifesto is accompanied by a laborious compilation of the costs of the Labour programme, the object of which must be to convince markets that Labour are on top of their fiscal ‘game’.

My sense is that the manifesto is characteristic of a party that wants to avoid any kind of policy hiccup before the election, and confirms my sense that the big policy moves, if there are any, will come in the autumn or early 2025, once the government has been bedded in.

On balance it is a manifesto for workers rather than capitalists. The message for workers is that income tax, national insurance contributions and VAT won’t change, but we will see small groups (private equity execs for instance) treated more severely. Also, with the abolition of generous non-dom tax status, the international wealthy will feel the fiscal pain, added to which private education fees will be charged VAT. These measures are expected to raise GBP 6bn, which is small in the context of the economy and deficit. More efficiencies in spending are expected to bring ‘new’ fiscal boost to GBP 8.5bn

From the point of view of companies and investors, there is not yet much here to worry about, but neither much to be excited for.

We also have a little more colour on the landmark innovation of the manifesto, GB Energy – the brainchild of Ed Miliband (one of the most experienced Labour ministers and the most ‘policy ready’ one). GB Energy will be based in Scotland and will invest in renewables (co-invest with the private sector in new green technologies and help scale up startups in segments like solar and wind and help to invest in the installation of green energy infrastructure). It will take on existing state-owned stakes in energy projects like GB Nuclear, and the aim is to capitalise it (likely in 2025 to the tune of GBP 8bn). One element for the energy sector is the flagging in the manifesto of much tougher regulation of the energy sector (in terms of consumer prices).

On healthcare, my first impression is that the improvements flagged for the NHS are not transformative and as a trend, point towards more outsourcing of services, away from hospitals. Finally, there are some interesting comments in the ‘serving the country’ section of the manifesto (reform of the House of Lords and a focus on ethics in public life). My expectation is that Labour will lead with these reforms once in power.

In more detail, I think Labour will win the July 4^th election, their immediate accession to power will be marked by a number of high-profile foreign affairs events (i.e. NATO summit) where Starmer will be able to look ‘presidential’. August will be quiet, and I think the early policy moves will come, as above, in the area of institutional reform.

As we move into the autumn, the focus will turn to economics, and I suspect Labour will lead this with a series of announcements on inward investment. The launch of GB Energy and the national wealth fund will follow.

This manifesto is deliberately ‘boring’ in the sense that it will ease Labour’s passage through the election campaign with little policy friction. Voters’ disdain for the Tories will be enough for Labour to win handsomely, and they may well be helped by the damage that the Reform party will do to the Tories.

With the economy in mind, the absence of chaos that should accompany a Labour government (as opposed to the Tories) should help, and a great deal will depend on international factors. However, the manifesto, in my view, is not a convincing plan in terms of kickstarting productivity in the UK economy. ‘Boring’ will not be enough to satisfy the economic challenge that has been left to Starmer.

Have a great week ahead,

Mike

Is Labour Ready?

Rishi Sunak’s sodden, tragi-comic, and surprise announcement of a UK general election was an amusing episode in a so far uneventful ‘year of democracy’.

The announcement was a boon to headline writers, who had fun with phrases like ‘Drowning St’. My attention was piqued by the background music ‘things can only get better’ (D:Ream), which added to the farce, but which British political aficionados will recognise as the song that was also used by Tony Blair’s New Labour party in their 1997 election campaign.

At the time, I was finishing my studies and happened to be in London on the day of the election, and vividly recall walking past Downing St, where the sense of a new era was palpable. Today, the challenge for Keir Starmer is whether he can spura new era of growth and renewal in the UK, or whether his party simply turns out to be ‘not the Tories’.

In the late 1990’s, Blair’s government, bolstered by a very strong front bench, had spent a long time preparing for government, and once in power made a series of dramatic policy moves (see our recent note ‘Does debt smother politics?). By comparison, the most important question for the July 4^th election – with the Tories 21 points behind Labour in the polls and destined to be wiped out (some 100 sitting MP’s, mostly Tories, will not stand this time) is, how ready are Labour?

Whilst the election announcement has taken many Tory MPs by surprise, my sense is that Labour would also have much preferred a November election – they still must find candidates for over 80 seats and faces a few awkward spots such as Islington North where Jeremy Corbyn will stand as an independent. Indeed, the fact that both the Tories and Labour are logistically unprepared for a July election might benefit the Liberal Democrats, which opens up a small chance of a coalition government (importantly electoral reform would be the price of this).

To date, Keir Starmer’s Labour has given relatively few details on its program, partly to allow space for the Tories to slip up and partly not to skew the debate on the outlook for the economy. This will be Labour’s greatest challenge.

When Blair came to power in 1997 the British economy was bigger than that of China and India together, the world was under the steam of globalization and debt to GDP in the UK was close to 40%. Today, China regards Britain as a ‘little island’ (nothing wrong with little islands!), globalization has come asunder and debt to GDP is 100%.

I suspect that if there are early, dramatic wins for Starmer, they will be in tax (cutting back exemptions for the wealthy and potentially a wealth tax), corruption (standards in public life), and institutional reform (end of the House of Lords?).

Revitalising the economy will take longer, notably because Labour will initially stick to the UK’s fiscal rules and take pains to avoid any early volatility in the pound and gilt markets. In order to enact its plans for technology and ‘green energy’ investment Labour will most likely have to create partnership with international institutional investors.

Outside of these areas it is not clear to me how Labour can immediately reverse the damage done to educational, social services (NHS) and the fabric of small towns and cities, exacted by the Tories. It will require a level of imagination, funding and policy continuity not seen in British politics for decades.

In foreign policy, Labour’s approach will be a much less contentious one – relations with Ireland (which have deteriorated since Johnson) will be much warmer, and the approach to the EU will most likely be less confrontational and more collaborative. Whilst David Lammy (shadow foreign secretary) has spent a decent amount of time in the US, courting Republicans and Democrats, the scenario of a Trump presidency and a Labour government is a high probability one, but a configuration that would stretch the notion of a ‘special relationship’.

In defence I expect little headline level changes to Britain’s commitments, but the shadow defence minister John Healey will likely re-organise the military command and HQ, and importantly spend a good deal of time reorganising defence investment and procurement so that it gives ‘value for money’.

In the next few weeks, Labour faces twin, urgent challenges – mobilising the party across the UK, focusing on making inroads in the south and Scotland, and then preparing for government in the context of a gargantuan challenge.

The good news is that the summer holidays start just after the election which I suspect will mean that the effective policy launch of the new government will kick off in September.

Have a great week ahead,

Mike

IQ v. AI

My friend David Skilling published an interesting note last week on the dangers of a Liz Truss style fiscal accident in the US. Many readers will recall that in 2022 Truss’ mooted economic policy led to an unwind in the gilt market.

The US has some of the ingredients that sparked the fall in gilts, very high debt levels and a political system that has managed to make Truss look normal (she is now a regular on the far-right circuit). That said, the US economy is robust, so it would in my view require a Trump led ‘rule of law’ crisis to profoundly upset the Treasury market.

Without dwelling too much on Liz Truss, who like many others appears increasingly radicalised by the American right, she is often invoked as an example of someone who is intelligent in an academic sense, but at the same time possessing no emotional intelligence (Amelia Oudéa Castéra is another recent example). An incorrect extension of this supposition is that people with high quality degrees in maths and physics should not enter politics.

Arguably, we need more scientists and mathematicians in government. For instance Singapore’s prime minister is a mathematician and economist. Returning to the UK another example comes in the form of David Willetts, who for a long time performed the role as the Tory party’s ‘boffin’ or in-house intellectual.

He was minister for Universities and Science between 2010 to 2014, where one of his roles was mapping the eight technologies of the future (AI and semiconductors, Satellites and Space, Robotics and Autonomous Systems, Geonomics and Synthetics Biology, Regenerative Medicine, Agri-Science, Advanced Materials and Nanotechnology, and Energy and its Storage) and how a national industrial policy could be built around them.

In 2023 in a very interesting document (if this is what excites you), Willetts published a review of the ‘Eight Technologies’ and subsequent UK industrial policy. It is full of anecdotes on political life, including a sketch of Nicholas Ridley’s (former Secretary of State for Trade and Industry) approach to his role as “no in tray, no out tray, only an ash tray”.

More seriously, the document helps to understand the hollowed out nature of the UK economy today, the bankrupting of industrial and education policy and the enormous task facing a (likely) incoming Labour government. I will emphasise a couple of things.

The first is that the pinpointing of the technologies of the future was, broadly, spot on. The second is that there were far too few people in politics and policy who had the requisite education to interrogate technologies such as satellites and robotics. Third was the debilitating effect of multiple reorganisations of innovation focused departments and a hollowing out of the capabilities needed to support innovation (third level education). Ultimately this produced an economic model and mindset that was not sincerely invested in innovation and that accepted Liz Truss’ budget as a viable plan to support economic growth.

It is also a mindset that has veered away from trying to frame a serious regulatory policy around new technologies like artificial intelligence (AI). The current UK government has a stated policy of ‘not regulating AI’, presumably because it hopes that a regulatory race to the bottom will attract AI focused investment.

This lacuna creates a difficulty for the Labour party, who have promised a coherent policy framework around AI (coming soon apparently). To date, the Labour point person on innovation and AI Peter Kyle has stressed the need for the government to streamline regulation so that innovation in tech is not unnecessarily impeded and has lauded the need for AI to drive the economy ‘create 10 DeepMinds’.

However, there is a looming policy battle between one side of the party that wants to promote innovation (Tony Blair Institute for example) and the unions on the other (the TUC has prepared papers on the impact of AI on the jobs market) that is more skeptical. The TUC paper is not particularly thorough and reads more like something a management consultant than a labour market specialist has cobbled together. It gives little sense of how AI will change the ways we work – how it could enable workers in industrial sectors and undermine those in white collar services for example.

That is a pity because, in the context of an AI bubble, the impact that AI will have on work is one of the emerging questions that need answering. Already a number of initiatives are springing up, such as the Martin School at Oxford and MIT’s Shaping the Future of Work project which is already throwing up some interesting policy recommendations.

If the UK wants to be a credible leader in AI it should follow an example Willetts outlines in his paper on an ‘extremely effective British official campaign during the 1980s to shape mobile phone standards in Europe and then globally around its operating system. Influencing the setting of international standards is key especially if they can be linked to intellectual property’.

It is now too late for the UK to set the standard in AI, but it might play an important role in helping to make the new EU framework (EU AI Act and supporting AI innovation package) more commercial, and more easily financed.

As Liz Truss said, we need an economic NATO in Europe.

Have a great week ahead,

Mike

Labouring on

Last Sunday’s lunch was made up of a pint (or two) of ale and a packet of pork scratchings, in the inimitable Peveril in the Peak, in Manchester. It was the start of a week-long tour of the United Kingdom, taking in Manchester, London, the Cotswolds and Belfast, from where I am sending this note.

In the Peveril we soon got chatting to a couple from the Wirral, and after a discussion on football and rugby, the conversation soon turned to politics, and specifically the question of why British people are not more visibly upset at the state of their country. Growth lags all European rivals, multiple corruption scandals are bubbling to the surface of political life, public services (i.e. NHS) have been degraded, and in particular the regions outside London are suffering.

Opinion polls suggest British people are ready for a change of government – Labour is eighteen points ahead of the Tories, far more so when it comes to younger voters. Indeed, a recent poll by YouGov (commissioned by a group of Brexiteers, allegedly) pointed to a 120 seat landslide for Labour. Yet, if British people are upset, they are nonetheless ‘keeping calm and carrying on’.

They may soon get their day at the polls. In a recent interview, prime minister Rishi Sunak suggested that the next UK general election (which must happen by next January) would likely occur in the second half of 2024. This has set commentators guessing the date of the election.

An important date to watch is the Tory party conference which will be held in the first week of October (1st, 2nd), and could thus point to an election just before or more likely after the US election (potentially around Nov 14th). At the same time, the risk of ‘noise’ from the US election might even push the UK election to earlier in the Autumn.

My sense is that Sunak will wait as long as possible given how far behind the Tories are in the polls and may try to engineer a low turnout (every UK general election going back to 1931 has been held on a Thursday, but Sunak could aim for a Friday election, hoping that low turnout could rob Labour of younger voters). Other factors and dates to bear in mind are the UK budget on March 6th and local elections on the 2nd May.

We might also bear in mind that Sunak may no longer be master of his own destiny. The Tories’ promise to send asylum seekers to Rwanda, which has become the organising idea within the party, was nearly ‘sunk’ by a rebellion by the very right wing of the party (reportedly prompting one MP to declare ‘my party has gone mad’). Sunak survived, but is at best a fledgling leader.

The Tories face two more by-elections – in Kingswood and Wellingborough – in coming months, and these will provide a good benchmark of how they are faring (there is a low probability that someone may try to unseat Sunak as leader if the by-elections go badly).

In that context, the election is now Labour’s to lose.

Labour have on several occasions performed less well than polls suggest, notably when the Tories under John Major snatched a victory in 1992 having been behind in the polls. The Blair led ‘New’ Labour (1997) was much better at campaigning and there are signs that Blairites are making a comeback in the ranks of the party now, and that their sense of discipline is holding.

While it is generally accepted that this Labour frontbench is neither as dazzling nor potentially transformative as that of the first Blair government (Starmer is less charismatic and less ’bullish’ than Blair), they are starting to behave in a Blairite manner.

So far, Labour’s strategy has been to allow the Tories to make mistakes. The Labour policy manifesto is, publicly, very dull, and does not give away much. I expect that they will launch more specific policy options in the immediate run-up to the election. This steady, cautious approach belies the fact that Labour has had only six prime ministers in its modern history – while the Tories have had five in just the last eight years.

With regard to the election and its aftermath, several issues will matter.

First, similar to Donald Tusk’s first months in power in Poland, Labour will emphasise a return to the ‘rule of law’ and the rooting out of corruption. Institutional reform (i.e the abolish the Lords, with electoral reform a wild card) and tougher policing of the behaviour of politicians and their associates will be prominent, and we expect there will be further inquiries into the behaviour of Tories/Tory donors.

Labour cannot (immediately) reverse or renegotiate Brexit. But there is scope for the EU and the UK to adopt a less antagonistic and more pragmatic stance with each other on trade oversight, financial services and the regulation of new technologies. Military and security cooperation might well grow even closer. In foreign policy, the UK should be easier to deal with (there is an outside chance that one of the Miliband brothers returns), and the most difficult issues for Keir Starmer will be Israel/Palestine, China and relations with the US (if Trump is elected).

Labour will inherit a difficult legacy in terms of the damage to the UK economy and the rising deprivation in the regions. The biggest task facing Labour is to rebuild the UK economy, re-equip and re-engineer social services and to achieve a sense amongst British people of a sense of ‘fairness’ (equality) across British society. Whether this will imply higher taxes (the Tories will likely cut taxes to low levels, trapping Labour) on individuals and companies, or even the introduction of a wealth tax, is not yet fully clear. Tax breaks, such as ‘non dom status’ would likely be phased out under Labour.

Labour’s economic policy will likely be more state driven – and privately financed, such as the issue of ‘green gilts’ to fund new green energy infrastructure. Rachel Reeves, the shadow chancellor is close to the Biden team and an admirer of ‘Bidenomics’. Also, like Gordon Brown, he is keen to emphasise fiscal discipline and as a potential chancellor will be keen to avoid a Truss style bond market wobble.

Labour are being very careful to guard their lead in the polls, and to not allow themselves to be held hostage to specific policies. They had best save their energy for the lengthy challenge ahead.

Have a great week ahead,

Mike