Leaving PIMCO.com

You are now leaving the PIMCO website.

Skip to Main Content
Economic and Market Commentary

U.K. General Election: Treading a Familiar Fiscal Path

The Labour Party’s win marks the country’s first change in government in 14 years, but its fiscal policies offer limited scope for change

The Labour Party’s election win, in which it secured a large majority, means it can govern with considerable freedom. The result was widely expected and, as such, we see limited implications for markets. As Labour’s fiscal agenda is modest, with a focus on delivering economic stability, there should also be limited implications for the economy.

This has parallels with Labour’s first term following its 1997 election victory, when the new Tony Blair government – with Gordon Brown as chancellor – tightened fiscal policy and focused on establishing credibility.

We expect the new government under Keir Starmer to maintain tight fiscal policies. This should facilitate a gradual decline in inflation and enable the Bank of England (BoE) to begin cutting interest rates soon – and potentially cut more than markets expect next year. Therefore, we believe U.K. government bonds (gilts) are attractive at current levels.

Policy constrained

The election result could affect the economy in two key areas: by influencing economic demand through fiscal policies, and improving long-term growth through supply-side policies.

On the demand side, Labour’s intended fiscal policies are modest. By 2028, the party plans slightly higher spending, worth around 0.3% of current GDP, which will be balanced by equivalent tax increases, keeping the deficit broadly unchanged. This fiscal approach should have minimal impact on growth and inflation, especially given the broader uncertainties around economic growth.

While policy intentions may change, any new measures will be limited by tight fiscal space. Labour plans to keep the current fiscal rules broadly intact, and it has close to zero fiscal headroom when it comes to the most binding rule: that debt must fall as a proportion of GDP in five years. While these rules could be amended to free up more fiscal space, the government is unlikely to make drastic changes in the light of the financial and fiscal volatility seen after the 2022 Liz Truss budget. Any additional spending will likely be funded by higher taxes, but this too is limited by a tax burden that is already at a post-World War II high.

Taken together, we expect fiscal policy to remain tight in the coming years, with the deficit gradually decreasing. Although Labour’s new policies are neutral for the deficit, they follow existing tightening measures announced by the previous government, which imply real-term cuts to spending and higher real-term taxation via tax threshold freezes. We see limited room for Labour to significantly deviate from this path.

The productivity conundrum

Instead of stimulating demand, Labour will likely focus on improving supply and long-term growth. The recovery since the pandemic has been sluggish. While there may be some mean-reversion ahead – indeed, momentum has picked up since the start of the year – we doubt the new policies will meaningfully change the long-term trajectory. In any case, growth policies take some time to filter through into higher activity.

Productivity growth in the U.K. has been declining for decades, more so than in many other developed countries. Improving productivity is a challenge, not least because the causes of this secular decline are not entirely clear. A softer stance towards the European Union (EU) might marginally improve growth prospects, but it is uncertain how much the EU would cooperate. More industrial policies may help specific sectors but are unlikely to boost overall economic activity.

The U.K. has also lagged in investment spending, partly due to a low savings rate and strict planning restrictions that limit construction. Recently, weaker economic activity also reflects a fall in the growth in the supply of workers, despite record immigration, as many people have left the workforce due to long-term sickness. Unlike in almost all developed markets, the labour force participation rate is now below its pre-pandemic level. New policies in these areas could boost future growth, and the next year will be a good test of how serious the new government is about addressing long-term challenges.

Investment implications

Financial markets haven’t reacted much to the election result, which is unsurprising given it was so widely expected. Indeed, markets are more focused on growth, inflation, and monetary policy.

While overall U.K. inflation is now back to its target of 2% year-over-year., core inflation remains high at 3.5% year-over-year. We expect core inflation to continue falling, as inflation expectations are anchored, the labour market has gradually eased, and fiscal policy remains tight.

We expect the BoE will start cutting rates soon, possibly at the next meeting in August. Going forward, financial markets expect the BoE to cut interest rates broadly in line with the U.S. Federal Reserve. However, we see potential for faster cuts in the U.K. due to low growth and tight fiscal policies.

Given this, we believe gilts are currently trading at attractive levels, especially compared with U.S. Treasuries. Across the curve, we continue to believe intermediate rates are the sweet spot for taking interest rate exposures.

Featured Participants


PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world.

The information on this website is for residents of the UK only.

All material contained on this website is purely for informational purposes only and is not intended as investment advice. Investors should seek financial advice before making any investment decisions.

PIMCO Europe Ltd (Company No. 260451711 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. Since PIMCO Europe Ltd services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Via Turati nn. 25/27 (angolo via Cavalieri n. 4) 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. According to Art. 56 of Regulation (EU) 565/2017, an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO Europe GMBH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-, Brandschenkestrasse 41 Zurich 8002, Switzerland). According to the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO (Schweiz) GmbH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser

CMR2024-0705- 3682542

Tell us a little about you to help us personalize the site to your needs.

Terms and Conditions

Please read and acknowledge the following terms and conditions:
{{!-- Populated by JSON --}}
Select Your Location


  • The flag of Canada Canada

Europe, Middle East & Africa