A tale of two Chancellors
Neither Jeremy Hunt MP nor Rachel Reeves MP are particularly pro-business
Over the past week, we have attended two small, private events with Chancellor Jeremy Hunt and shadow Chancellor Rachel Reeves. Both presented very different visions for the UK economy and positioning for the general election.
Our view:
Neither is espousing a particularly pro-business rhetoric, but the business community has largely rowed in behind the Labour Party given their consistently higher polling numbers, with the calculation being that flattery now will translate into access later. Labour is reliant on its current campaign message discipline and continued high Reform Party polling numbers to win with a large and cohesive enough majority to govern, whereas the Conservatives need to win back Reform voters, stem the media narrative of drift and despair, and find a way to straddle the cultural divide amongst their fractious voting coalition to hold on to power, or at least limit the scale of a Labour victory.
Our broader views:
Chancellor Hunt seemed surprisingly sanguine and signalled an initial campaign pivot from wooing Reform to attacking Labour
Hunt acknowledged the Conservative Party must respond to electoral demand for lower and controlled immigration, reflecting Reform’s high polling numbers. With Reform’s support relatively stable, expect Conservative moderates like Hunt to continue to adopt this approach. We do not currently expect this to be very successful. The Conservatives have already brought in new more restrictive immigration policy rules that made international hires essentially unaffordable for small businesses. The attendant fall in immigration numbers will come with a lag, however, and will likely show up in the mid-November 2024 immigration statistics release, pointing to a later election than expected. Although further significant immigration reform this year is possible, we think it is currently unlikely.
Chancellor Hunt spent much of his speech testing out unmemorable attacks on the Labour Party’s economic platform, an early indicator towards a more confrontational approach to Labour. The attacks focused mainly on fear and uncertainty. Labour’s unwillingness to offer much in the way of detailed policy proposals has limited the Conservatives’ ability to land solid attacks, making Hunt’s attacks seem scattered. Hunt did not get much cut through from the largely friendly audience, indicating the uphill battle the Conservative leadership faces, even amongst their own membership.
The main beneficiaries from the Conservatives’ more restrictive immigration policy will be larger businesses, which can afford the increasingly expensive fees to hire international staff while also facing less competition from smaller, largely domestic firms. The approach will likely act as a cap on the UK’s productivity growth in the near- and medium-term. Labour is less likely to focus on immigration reform than other areas such as net zero and healthcare reform, should they come to power, so this trend will likely continue.
Shadow Chancellor Reeves has become well versed in attacking the Conservatives and wants to overhaul the labour market
Reeves has become adept at attacking the Conservatives and flexible with her targets. She can convincingly tie in politicians like her opposite number, Jeremy Hunt, to the declining state of the NHS and his previous role as Health Secretary rather than in his current role as Chancellor. Her attacks are much more memorable – she gets better cut through than Hunt
Reeves continues to employ message discipline. Labour has been tight lipped when it comes to the detail of how it plans to govern. We think this indicates a preference for increased taxation, spending, and regulation, none of which are currently vote winners. Once in power, we expect that pivot to take place fairly quickly, given the time it takes for contentious legislation to pass through Parliament and the untested nature of most new MPs.
Reeves would be more interventionist in the labour market. Reeves has consistently said Labour would enhance workers’ rights from their first day of employment, ban zero-hour contracts, and increase the real living wage, all of which are routinely applauded by business. We view this applause as acceptance of the likely changes with an eye towards future access in more future-oriented policy areas like sectoral regulation rather than full-throated support.
Labour does have ambitions to change the shape of the UK’s economy. Proposals for the labour market alone could shift the UK’s labour market away from one of moderate flexibility to one of comparative rigidity. The timeline for potential implementation and outcomes are both obviously unclear, but the UK is a service-oriented economy, which tends to benefit from a flexible labour marker. The experience of southern European labour markets, where workers have enhanced worker protections from their first day of employment, has led to structurally higher rates of youth unemployment and chronic brain drain. Other European countries like Germany have built a solid, value-added oriented manufacturing sector underpinned by rigid labour market rules, but these firms benefit from a relatively lower priced Euro that essentially subsidises German manufacturing exports to China. Neither model is easily transferable to the UK’s economy.
The business community has shown near unanimity of support for Labour, but this could change in the relatively unlikely event that Reform’s polling numbers stall or reverse. Reform has fielded few prospective Parliamentary candidates (PPCs) and has limited local campaign infrastructure in place, but their positioning as a credible “protest vote” seriously concerns Conservative strategists. No. 10’s primary current aim is to shift momentum from Reform to Conservative because it would deeply unsettle Labour almost immediately. Most pollsters we talk to think this outcome is exceedingly implausible. Nevertheless, there is the risk that the business community is caught out in their full-throated support for Labour if Reform’s polling support falls or Reform opts to not run against Conservative candidates, for example.