What a week that was (again). It would be harsh to say that he’s easily forgotten but just a reminder that it was only this week that Sir Keir Starmer announced he would be stepping down as leader of the Labour party and therefore as Prime Minister. So much seems to have happened, including the seemingly inexorable march of Andy Burnham to taking his place.

We’ve had both England and Scotland football teams blowing cold, which were just about the only things that were, as record temperatures were reached across the UK. Apologies to anyone reading this in the Shetland Islands with the temperature in Lerwick peaking at 16C (Ed – I’m off to get a flight to Tingwall airport straight away!) Another ceasefire has been agreed between the US and Iran, oil prices are dropping, though there still appear to be significant differences and challenges over the 14-point deal. Inflation remains above target in both the UK and US.

Labour Leadership

Anyway, as Jen Frost says at Professional Adviser, “while Burnham’s coronation, as one analyst described it this week, appears pretty much a known right now, a glaring known unknown persists. That known unknown is who his right-hand person, or chancellor, will be.

That, rather than Burnham himself, is likely to be the critical factor that determines the UK’s fiscal direction of travel, our MPS Showcase North delegates heard this week. A roster of names has been bandied about in the press. Among them, Yvette Cooper, Wes Streeting, Ed Miliband (possibly the most polarising could-be pick, with even the unions at loggerheads) and indeed incumbent Rachel Reeves.

It’s telling that, on the ground at MPS Showcase North, Reeves was touted by some as potentially the safest pair of hands despite unpopular policies (IHT on pensions and ISA reforms, anyone?) within the financial advice space.

Depending on his chancellor pick, a Burnham prime ministership could mean further major tax changes. His chancellor will also have to contend with today’s fiscal reality and – as we saw with the disastrous Liz Truss and Kwasi Kwarteng mini budget in 2022, admittedly likely to look very different to plans Burnham might bring into play – the very real risk of spooking bond markets.

With Burnham’s ascension – assuming we rule out a shock contender – anticipated by September there is little leeway to prepare for the upcoming Autumn Budget.

Starmer’s departure was pretty much baked into market expectations. What follows next under (probably) Burnham is less certain!!

Meanwhile JPMorgan’s Chief Market Strategist, Karen Ward set’s out what she would like to see Burnham’s first weeks in office:

1. Growth, growth, growth

I still remember Tony Blair standing on the steps of No 10 when he took office stating that his priority was ‘education, education, education’. I would like to hear Andy Burnham say that his priority is ‘growth, growth, growth’.

The UK working population has not had real income growth for two decades now. A lack of growth is the root of all our economic, social, and political problems. The table below, taken from the recently published report written by Paul Johnson for Prosperity Alliance, is quite frankly heart breaking.

If we don’t kickstart growth, we have real trouble ahead because our population is ageing rapidly. If we don’t grow the economic pie, we will not be able to provide the upcoming cohort of retirees anything near the pensions, health and social care that are received by the current cohort. Nor will we be able to cope with the new challenges we face, such as the need to spend more on our energy and military infrastructure. Spending that is necessary in a more geopolitically fractious world.

Fixing the economy will fix our politics. When the pie isn’t growing we turn against each other to try to hold on to our own individual slice. Pensioners vs. workers, homeowners vs. renters, rich vs. poor. Such an internal conflict is fertile ground for populists and so we enter a vicious cycle of political instability.

Growth has to be at the heart of the agenda, and every decision must be scrutinised as to whether it is consistent with a growth plan.

2. Support from the backbenches to allow tough decisions to be made

The Labour Party has a large majority in the House of Commons. Early in a parliament is when a government should be using its majority to do the tough stuff so that it can start to focus on the sweeteners when the election starts to approach. The clock is ticking.

We need to see that Burnham can succeed in leading his backbenches to make the tough choices in the way that Sir Keir Starmer was seemingly unable. Otherwise, we will continue to be a nation run by the backbenches, not the cabinet.

What are these tough choices? On spending, the Labour MPs must show a willingness to back a plan to bring welfare spending under control.

Welfare reform should also tackle the UK’s ‘ratchet problem’. In the UK, many of our outgoings are linked to inflation but our tax receipts are not. They depend on how much wages are going up, which often does not rise as much as inflation. As a result, whenever we are hit by an inflation shock, our outgoings permanently jump up relative to our incomings. And 25% of our outstanding government debt is index-linked. The bond market is therefore well aware that each temporary inflation pop results in a permanent cash flow imbalance. Cost shocks (often caused by a disruption elsewhere in the world, beyond our control) are therefore causing bond yields in the UK to rise more than in other countries just at the time our economy needs help. This is an unnecessary vulnerability.

Burnham should therefore act to remove indexation so that all benefits rise in line with average earnings. This move would include losing the grossly inequitable pensions triple lock, which has cost £12 billion more annually since 2011 than it would have it had been uprated in line with average earnings.

Removing the triple lock is not the only area of the manifesto Burnham should be asking for backbench support to scrap if he does want to spend more on growth enhancers, such as investment.

In theory he could spend more on investment without raising taxes or breaking the fiscal rule since spending on ‘capital’ was already removed from the binding constraint. But Burnham would still need to persuade the bond market to lend him the money if he is not willing to fund it from elsewhere and it’s unclear that the bond market would tolerate such a request.

If he wants to fund the spending from higher taxes, he might need to break another manifesto commitment – to not change the main rates of income tax or VAT.

These taxes raise a lot of money with only small changes and therefore spread the burden widely across the population. So, while still not ideal for growth, they are arguably less damaging than those tax options where the changes have to be very large to raise much money, or those that create an additional burden for companies. Companies have to be protected, because, at present, the level of private investment and hiring is concerningly weak.

3. Fiscal credibility

Meeting my first two criteria will go a long way towards establishing a convincing plan that will encourage bond investors to buy the £300 billion+ of Gilts that the government needs to sell in the next three years. But the government still needs to have a fiscal rule that binds. This requirement actually isn’t so much about the Gilt market. It’s about how the government will manage the daily asks that will come from departments in the coming years. It’s much easier to bat spending requests away when there is a rule that is binding.

So, there you go – easy. Alas, as I read this back it is clear why I am an economist, not a politician. Maybe this is too politically hard to deliver. Maybe seventh time won’t be lucky. But let’s be optimistic for now. Where there’s a will, there is a way.

Market Commentary

The US / Iran deal lowered oil prices, re-opened the Strait of Hormuz and boosted the global economy, yet equity markets did not rally on the news. Lothar Mentel, Tatton’s Chief Investment Office and CEO uses this market update to explain this market dynamic and then discusses the AI ‘non-bubble’. He also provides his thoughts on the SpaceX stock market listing, and finally outlines how Tatton is positioning its portfolios to take advantage of potential market opportunity. Click on the picture below: 

The team at Tatton Investment Management have also prepared their usual considerations of what the heck has been going on this week in the Tatton Weekly.

• Mind the money flow at quarter end – Jittery equity markets tell us that earnings growth exceeding stock market growth is not the only cause of market direction in the short term.
• Andy’s Economics – Tax and spend or fiscal discipline? What are the economic policies of Andy Burnham, Britain’s most likely next Prime Minister?
• Greenspan-ism lives on – Alan Greenspan ran the Federal Reserve for nearly twenty years, and in the week of his passing at 100, we examine his influence on the new Fed Chair and US finances.

In their latest Weekly Digest, Head of Market Analysis John Wyn-Evans at Rathbones reflects on why markets remain calm despite no shortage of headline drama. Another UK prime minister is on the way out, a new Federal Reserve chair has nudged interest-rate expectations higher, and SpaceX’s record stock offering shows animal spirits are far from doused. While bond markets may keep fiscal plans in check, and inflation risks still warrant caution, resilient earnings and strong cash flows suggest selectivity matters more than sweeping market calls. As ever, staying disciplined and filtering out the noise remains the best course.

Starman 

Talking about another Starman’s thoughts to the future I read an interesting article from  David Coombs, fund manager at Rathbone Multi-Asset Portfolios, on the ‘picks and shovels’ companies that are the stardust of the entire space economy and thought you might like to take a look so attach it for you.

SIPP-Slop

CityWire reports that the FCA proposed new rules this week to make Sipp operators more accountable for due diligence on pension investments, amid concerns that providers have been applying existing guidelines inconsistently. The regulator set out plans for explicit rules covering Sipp due diligence, including checks on investments, advisers, introducers, and discretionary investment managers (DFMs).

It also proposed a new regime for pension scheme money and assets, designed to improve record-keeping and protections where assets are held through unauthorised trustees or third parties.

While the additional due diligence would be ‘proportionate’ and judgement-based, the core requirements mean Sipp providers must check an asset ‘can be reliably valued at the outset and on an ongoing basis’.

Rachel Vahey, head of public policy at AJ Bell, said that while she agrees with the policy’s goal, she fears that introducing a whole new set of rules risks overcomplicating the rules and could push up costs for firms and clients.

‘We absolutely agree with the policy intent, but we need to make sure it’s done in the most sensible and proportionate way,’ she said. ‘What this means is we end up with a more complicated environment to navigate, and there is less flexibility for Sipps. It also means additional operational costs that aren’t necessary, and there is always a risk that extra costs could get passed down to clients.’

The investments in your accounts are very unlikely to be affected, but if you are thinking of swapping your current liquid assets for say a more Whisky based portfolio, then you might find it more difficult!   

“An Englishman’s home is his castle!”*

That saying has been around for centuries. And unfortunately, quite a lot of the homes we have are centuries old too (even if most aren’t castles), says 7IM.

38% of the UK’s housing stock was built before 1946 – in Europe it’s under 20%.

Amongst the variety of reasons for why we are on our seventh PM in a decade, the core problem remains unchanged.

Growth.

And, as the mash potato masterpiece above suggests, homes are part of the problem, but also maybe the solution.

Building new homes creates lots of jobs in planning, materials and construction – as well as all the secondary industries (transport/cafes/hotels) around it. It also makes an economy more flexible, allowing people to move around.

Repairing what’s already there doesn’t have the same effect. Getting the decorator round might get you a classier living room, but the benefits don’t go much wider than that.

 Over the past decade, the UK has gone down the repairs route; we now spend 40% more on repairs and maintenance than in 2016, becoming even more acute since COVID. But we’re spending basically the same amount on new builds as we were ten years ago (the post COVID bump was simply a reflection of the COVID dip).

UK spending on housing (public and private)

Source: ONS

In the UK it’s almost a 50/50 split between new and old spending. For comparison, in Europe it’s 60/40 in favour of new builds, in the US it’s 70/30, and in most Emerging Markets, it’s 80/20.

We’re fixing castles, instead of building them.

Shift that spending just a few percentage points in the right direction and it could help the perpetual growth problem.

Some of this is down to rising interest rates. New buyers can’t quite get the mortgage they could when rates were at zero.

And to make matters worse, there’s stamp duty. It’s basically the worst a tax can be in terms of a disincentive. Paid in cash, up front, unavoidable – which makes it easy to compare to the other option of renovating.

“Why don’t we save the stamp duty and the stress and just repaint/renovate/do an extension?”

Now, we’ve no idea what decisions Andy Burnham as new PM might prioritise. How to generate growth is surely on the agenda. But if they were prepared to think big, stamp duty is an obvious target, no matter what rates do.

 Build more castles …

*Behaviour also applies in Wales, Scotland and NI!

Miscellaneous

Money Week confirmed that the Treasury has revealed plans for a revamped Lifetime ISA (LISA) product that will remove the upper age limit and withdrawal charges but the retirement savings component will also disappear. Chancellor Rachel Reeves revealed in her 2025 Autumn Budget that the government would launch a consultation on a “new, simpler ISA product to support first-time buyers to buy a home” in “early” 2026. A consultation released by the Treasury this week said there is evidence that the current product is “not working well for many”. The new First Time Buyer ISA (FTB ISA) will solely be for the purposes of buying a first home. Unlike the LISA, which has to be opened by age 40 and the bonus can only be earned until age 50, there will be no upper age limit. The government bonus will be paid as a percentage of subscriptions made, rather than the value of the account, at the point that an individual withdraws funds to purchase their first home.This means that the bonus is calculated on what an individual has put into the account, minus any withdrawals made, not on any investment growth or savings interest accrued subsequently.

Finally, the Treasury confirmed that it will be applying a 22% flat-rate tax on cash interest within stocks & shares ISAs, from April 2027 reports Professional Adviser. Forming part of draft rules for cash ISAs published on 23 June, the new rule will be subject to consultation. The changes see a flat rate charge on any interest or alternative finance return paid on cash held within a non-cash ISA. Additionally, the rules state non-cash ISA portfolios made up of 100% cash-like assets will be non-qualifying investments. Transfers from non-cash ISAs into cash ISAs will not be permitted. It will remain possible to transfer from a cash ISA to a non-cash ISA. TAM Asset Management UK CIO, James Penny suggested this rule will not have the desired effect of encouraging retail investment, especially in the UK market.

And if ever there was a need to remind yourself just how old you are, taking you son to look at potential universities is definitely the way to do it. But from what I have seen the future is bright and I think in good hands with all the students we have met so far. I hope to catch you next time.