United Kingdom: Leadership race shapes fiscal outlook – TD Securities

TD Securities’ James Rossiter and Julie Ioffe argue that Prime Minister Starmer is likely to be replaced by late September, with Labour’s leadership race centering on Burnham, Streeting, Rayner and Miliband. They expect Labour to shift left over time, with higher spending and taxes, possible defence-rule carve‑outs, but no early general election before at least 2028.

Starmer exit path and Labour policy mix

"Our long-held base case view that PM Starmer would be replaced this summer is now playing out. Candidates are lining themselves up for a leadership race, likely to be launched in late June. It's the start of a slow end for Starmer."

"The end result is that the Labour party is likely to shift to the left. Even if the party sticks to the fiscal rules, it's likely that both spending and taxes rise, and borrowing may rise if defence spending is carved out. However, we don't expect a general election to be called before 2028 at the earliest."

"While any leadership contender will continue to stress the importance of Labour's fiscal rules, it's clear they will want to put their own stamp on the policy (Chancellor Reeves will almost certainly be replaced when Starmer goes). A candidate further on the left may well stick to some form of Reeves' rules, but will likely want to increase spending, meaning higher taxes."

"It's worth stressing that with such a large majority (currently 165 seats), the Labour party is in a comfortable position in Parliament. Especially in light of the current state of the polls, a new leader will almost certainly not want to call a general election anytime soon (unlike Boris Johnson, who called one just three months into the job)."

"We suspect that if polls have moved favorably under a new PM, the election could take place sometime in 2028, but it will be a clear function of the polls at the time. An election in 2026 or 2027 remains unlikely, in our view."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)