Budget 2025: Market Implications of the Labour Party Conference

Saxo has teamed up with Helen Thomas from BlondeMoney to launch a series focussing on the UK Budget. This is her second piece looking at the political landscape, economic outlook and implications for financial markets.

Market Implications of Labour Party Conference:

• The government is in denial and so too are the markets. Simply expecting tax rises to plug the gap is complacent. The conference debates barely touched on the scale of the trade-offs required.
• Labour Party MPs and activists expect action such as scrapping the two child benefit cap and still believe wealth taxes are one way to pay for that. Enemies of Prime Minister Starmer sense blood in the water.
• The Chancellor will be under pressure to deliver at least some policies to please those on the left, putting the burden on capital rather than labour.

This means:

Favour UK dividend-paying stocks over growth stocks: Dividends already taxed at higher levels. Any increase to Capital Gains Tax would harm growth stocks more

UK Gilt volatility to increase: Bond auctions will be moments of vulnerability. UK-EU and UK-US yield spreads to widen

GBP to come under pressure: GBP/USD to fall back into the 1.2000s

One word sums up the Labour Party Conference this year: Denial. Denial about the scale of the economic challenge; denial about the breadth of discontent within the party and the country; and Denial over what must be done to resolve the situation.

This left the mood somewhat bipolar, with fringe events tinged by mania whilst wrestling with depression below the surface. 

Speakers exhorted members to fight hard for what they believed in, even as it became clear that different factions believe in quite different things.

To avoid having to engage in too much self-reflection on this issue, bogeyman were erected and audiences were called upon to boo at them.

A newly promoted government minister told the audience that he wanted to "grind what's left of the Tory party into the dust".

New Treasury Minister Torsten Bell labelled Liberal Democrat leader Ed Davey as a "fat bloke in a wetsuit". 

Journalists, picking up on this, fell over themselves to get ministers to call Nigel Farage a racist.

This is usually the talk of an opposition party, rousing the troops whilst campaigning for office.

One councillor said that all anyone talks about on the doorstep is Reform, lamenting that Reform could get away with saying anything because they didn't actually have to deliver.

But it gives oxygen to the opposition by framing the battle against them.

The message of the whole conference was that we are in, as Starmer put it in his speech, "a fight for the soul of our country", pitching himself against Farage.

Party management remains a struggle for the leadership.

Ministers were confused by the recent reshuffle, some admitting that they weren't sure why they had been moved.

Those who welcomed their promotions were more sanguine but struggling to get to grip with their new briefs.

Leadership itself remains troubled.

Despite Andy Burnham rowing back on his ambitious coup attempt, everyone is discussing who the replacement for Keir Starmer will be.

The Deputy Leadership election will act as a lightening rod for discontent.

Lucy Powell, the expected victor, said she would not take a cabinet role if elected, signalling that she wants to remain outside of the government in order to provide a critical voice (and avoid being tainted by poor decisions).  

Whilst the internecine warfare rumbles on, the financial position of the country remains precarious. 

Reeves is fighting Gilt markets daily for her political life but she is in denial about what is required.  

Her plan is to lobby the OBR over her assumptions for growth such that she only has to tweak a few things to raise the sums required to meet the fiscal rules.

And if that fails, she will break the manifesto pledge not to raise the big taxes, blaming it on the upcoming OBR revisions to productivity growth which itself will be blamed on "fourteen years of the Conservatives".

Hence Reeves peppered her conference speech with 23 reference to the Conservatives, even as the Prime Minister focused squarely on Reform (raising a laugh with his quip about "The Tories - remember them?").

Starmer spent the economic sections of his speech referring to the ideology that Reeves outlined in her 2024 Mais Lecture.

He said this goes back to the financial crisis, that "we placed too much faith in globalisation", that there was complacency and "lazy assumptions... that immigration is all we need to give us the workers" and that "it doesn't matter if wealth creation is hoarded by just a few communities".

He said the "defining mission" of his government is to "change the way we create growth".

He echoed Reeves' Securonomics ideology by promising "Never to risk economic stability".

He said "it doesn't matter if it's unfunded tax cuts or unfunded spending... I will never let that happen to working people", that "A Labour Party that cannot control spending is a Labour government that cannot govern for our times", and "This is why the fiscal rules are non negotiable".

Foreshadowing Reeves' argument to come, Starmer said "The Tories piled up mountains of debt with no productivity to show for it".

But the problem is the debt mountain and concomitant borrowing keep climbing.

Stability was supposed to deliver a growth dividend but fiscal decisions have been rather unstable, with u-turns on winter fuel, welfare reforms and potentially to come on the two child benefit cap - all of which add to the fiscal hole rather than reducing it.

Starmer and Reeves might sing from the same securonomics songsheet but last minute hikes to national insurance and an inability to pass slower spending increases despite a huge majority means the government looks anything but secure. 

And we remain in the hiatus ahead of the budget where even the Chancellor doesn't know yet what will be in it because she doesn't know how the OBR will model her choices.

Former Chief Secretary to the Treasury (and now Chief Sec to the PM) Darren Jones tried to preserve optionality over possible breaking of pledges with the tortuous formulation that the manifesto 'stands today because decisions haven't been taken yet'.

Conference was not utilised as a moment to reassure markets of a plan.

Instead it was simply an exercise in denial.

Those shackled to Starmer were trying to convince themselves they would get to the promised land in the end, but that they would need to beat Reform to make it there.

Those who hate Reform but hate Starmer even more were in denial about the difficulty of destabilising the prime minister without destabilising the bond markets.

All sides were in denial that whilst Labour argue between themselves, the country moves on.