What the final election means for the financial system and your funds

On Wednesday, Rishi Sunak announced the next general election will be on 4 July.

The economy is likely to take centre stage as both major parties ramp up campaigning.

For now, little is known about what the major parties are set to include in their manifestos but there have been hints over the last few months.

The Conservatives will hope that slightly better than expected economic indicators, and the prospect of rate cuts this year, will give them a boost, while Labour will  argue that people are still struggling.

In the coming weeks, manifestos are likely to be unveiled and voters will have a better understanding of how policies might affect them.

We look at what policies have already been announced, and what it will mean for your finances.

Economy

The economy has been the central narrative in the run-up to Sunak’s announcement on Wednesday.

News that inflation is nearing the Bank of England’s 2 per cent target may well have provided Number 10 with a boost. 

Labour hit back and said that prices are still ‘sky high’ and that the Tories ‘can’t defend’ their record. 

Paul Dales, chief UK economist at Capital Economics predicts the election is ‘unlikely to lead to a dramatically different economic outlook.

‘With Brexit decide long ago and Labour having become more centrist under Starmer than under Corbyn, there is not much at stake for the economy in either the near-term or further ahead as there was during the elections in 2017 and 2019.’

While Sir Keir Starmer has pledged economic stability, the nation’s public finances might constrain him.

Recent data from the Office for Budget Responsibility reveal net borrowing was £1.2billion ahead of forecasts and £1.5billion higher than a year ago.

Lindsay James, investment strategist at Quilter Investor says: ‘Finances are already stretched close to breaking point and at levels last seen in the 1960s… This provides an intriguing backdrop for the general election’.

Labour has said that their fiscal rules will be similar to the current ones, which means their approach to fiscal policy is likely to stay the same.

The good news for both parties is that the economy isn’t likely to deteriorate any further this year.

Dales says: ‘Inflation will still fall further, the economy will probably improve and interest rates may be cut in August.’

Even if the economy does improve, there are deeper rooted issues like productivity and growth which the winning party will have to tackle when they take office.

Dales says: ‘Labour’s stance on new towns and climate may mean Labour is better placed to boost both public and private investment. 

‘It’s possible the Conservatives might regulate AI with a lighter touch, which may mean it boosts productivity by more.

‘Either way, our forecast that the UK’s economic growth rate will accelerate in the 2030s is based on the benefits from AI rather than government reforms.

‘If that improvement happens sooner, the winner of the election may be lucky enough to benefit from an easing of the fiscal constraints.’

Tax

The fiscal constraints mean there is little chance of tax cuts, which were widely predicted for the Autumn.

Last week Chancellor Jeremy Hunt hinted at another National Insurance cut, but a summer election now makes this unlikely.

The Conservatives are likely to campaign on cutting National Insurance if they return to government as the tax burden reaches its highest level in decades.

Labour has vowed not to raise the rates of income tax or corporation tax on company profits, or reserve the Chancellor’s 2p cut to National Insurance if it come to power.

Instead it intends to charge VAT on private school fees and to tax the overseas income of those with non-dom status.

Dales predicts ‘taxes, spending and investment as a share of GDP might all be a bit higher under Labour.’

Laura Suter, AJ Bell’s personal finance director says: ‘For some, taxes need to rise in order to fund already-stretched public services. 

‘For others, ever-increasing tax bills are evidence that public spending is out of control and taxes need to be cut to incentivise growth.

‘In truth, there is very little wiggle room in either direction. Taxpayers will struggle to stomach further tax increases, while tax cuts will eat into the future Chancellor’s budgets, which is crucial to any spending commitments either party plan on.’

House prices and mortgages

The state of the housing market will be another key battleground ahead of the election. 

Prospective first-time buyers, who are currently priced out of the market, will be looking for further support to help them get on the housing ladder.

The Lifetime Isa has been a key component for aspiring homeowners, but the current property limit has remained at £450,000 since its launch in April 2017. If it was increased in line with average house prices, it would have increased to £580,500, according to AJ Bell.

Housebuilding will be another divisive issue for the major parties, as they attempt to bring house prices down.

Before the 2019 election, the Conservatives promised to build 300,000 new homes in England a year. Last year, fewer than 250,000 were built across England, Wales and Scotland.

Labour has promised to overhaul the planning system and has committed to building 300,000 homes a year.

Elsewhere, homeowners will hope that a rate cut, now widely mooted to be in August, will help to drag down the average mortgage rate.

However, neither major party have spelled out the ways in which they might fix the broken housing market.

Elliott Culley, director at Switch Mortgage Finance says: ‘More than 15 housing ministers since 2010 has left the housing sector in ruin. If Labour does win they need to tackle the issues in the sector decisively. Now we are in to election season, let’s see what pledges are made. This will give us a steer as to how the economy will react.’

In the immediate term, Rightmove predicts that there won’t be a slowdown in the market in the run-up to the election.

‘An election in the summer, when the market is traditionally slower, could have less impact on housing market activity than if one had been called for the Autumn,’ it says.

‘So, as we head towards this election, the housing market is likely to stay active, with activity ramping up once the election is over and things become clearer. It could mean that we’re gearing up for a stronger than usual August, especially if we see interest rates finally start to fall.’

Pensions

Labour and the Tories have both pledged to keep the state pension ‘triple lock’ for the whole of the next parliament, as they fight for the support of older people – who tend to vote, writes This Is Money’s pensions editor Tanya Jefferies.

That means pensioners should carry on getting decent increases every year, set by whichever is the highest of inflation, average earnings growth or 2.5 per cent, until nearly the end of the decade.

Thanks to the triple lock, they got a 8.5 per cent rise in April, boosting the headline rate to £221.20 a week.

The basic state pension for those who retired before 2016 went up to £169.50 a week (but older pensioners often receive hefty top-ups if these were earned during their working lives).

The Tories broke the triple lock once during the pandemic, when they could credibly plead special circumstances, and we should assume neither party will risk pensioners’ wrath by doing this again.

However, to afford the huge bill they might have to bring forward increases in the state pension age, which is already scheduled to rise from 66 to 67 between 2026 and 2028.

The timing of the next rise to 68 is very much up in the air, and before an election both parties will probably do their best to avoid this topic, for fear of riling up voters in their 40s and 50s.

But the Tories and Labour could be at odds during the campaign over the abolition of the £1,073,100 lifetime allowance – the total limit people can have in their pension pot without facing tax penalties.

Labour initially said that if elected they would bring it back, then went quiet. We could learn more when we get their manifesto, unless they drop the idea to retain the good will of doctors whose support they need to overhaul the NHS.

Both parties are likely to stick with Chancellor Jeremy Hunt’s plans for using people’s pension savings to help boost UK economic growth.

The fate of a consultation on giving workers a single ‘pension pot for life’, which they and all employers kept saving into throughout their careers, is less certain.

Shadow Chancellor Rachel Reeves is planning a major review of pensions if there is a change of Government.

Bills

Higher energy bills have been a particular pain point over the last few years, as prices reached record highs.

The Conservatives are likely to point to the support they gave people in the form of the Energy Bills Support Scheme, which was introduced in 2022. They will also point to the price cap falling to £1,690, and likely to fall again by the end of July to £1,574.

However, Labour are likely to argue that voters are still struggling to make ends meet as the impact of inflation is still felt.

The Party has proposed the launch of a publicly-owned clean power company, Great British Energy Company. It says it would ‘cut bills for good and boost energy security’ by introducing a windfall tax on oil and gas companies.

Investment 

In the March Budget, the Chancellor announced the creation of a British Isa, which would allow savers to invest an extra £5,000 a year tax-free in UK stocks. It is currently under consultation, which is unlikely to conclude ahead of the election.

In contrast, Labour has pledged to simplify Isas, although it has not provided much detail beyond that.

Selby says: ‘Regardless of who triumphs in the general election, the UK ISA should be confined to the policy dustbin, with focus instead trained on simplification and increasing the Isa allowance. This would be much more likely to boost UK Plc over the long-term.’

Jason Hollands, managing director of Bestinvest predicts that if Labour win the election, there could be a significant overhaul for Isas.  

‘When you consider the narrative set out by Shadow Chancellor Rachel Reeves in her Mais lecture which stated Labour will ‘launch a review of the pension system, to ensure it is serving British savers and UK PLC’, this might also hint at what could be in store for Isas too i.e., could Isas be reshaped so that access to the tax benefits requires a minimum allocation into UK assets? 

‘It is pure conjecture at this stage, but a possibility given the high-level economic thinking set out by Labour.’ 

The Government’s plan for a sale of its shares in NatWest have also been thrown into doubt. 

Officials had reportedly been working towards a retail offer in the next month, but the July election will likely put this on pause. 

It could see the Labour Party run a campaign reminiscent of the ‘Tell Sid’ campaign, when British Gas and British Telecom were sold off in the 1980s, at the same time it oversees the launch of a publicly-owned energy company.