Last night’s interviews with David Cameron and Ed Miliband showed that the two men who could be Prime Minister in just six weeks have very different views on how the UK economy should be run. While David Cameron is proposing deeper cuts and lower taxes, Ed Miliband is considering the introduction of additional/higher taxes, as well as seeking to redistribute wealth to a greater extent than a Conservative government would do.
For individuals with ISAs, then, would an Ed Miliband-led government be good news or bad news? And, should you wait until after the General Election before investing this year’s ISA allowance?
Initial Reaction
If Ed Miliband does become Prime Minister, it is likely that the FTSE 100 will fall. That’s because investors do not like sudden change, or the prospect of sudden change, and so having a different Prime Minister with a whole host of new policies and ideas is likely to cause investor sentiment to weaken in the short run. This could be exacerbated by the prospect of a disorderly hung parliament, with the relative simplicity of the Conservative/Lib Dem deal in 2010 unlikely to be repeated this time around, simply because the SNP and UKIP may also have a say in negotiations this year.
Policies
Clearly, Ed Miliband’s policies are somewhat different to those of David Cameron. For example, he is proposing a tough new regulator for the domestic energy sector and is seeking to freeze energy prices until at least 2017. This is likely to hurt the share prices of domestic energy companies during the short to medium term, although the sector is already trading at a discount to reflect this to a considerable extent.
Furthermore, Ed Miliband is more likely than the incumbent Prime Minister to raise taxes. This could be in the form of a mansion tax, higher personal taxation, or less favourable business tax policies. The effect of higher taxes could be a reduction in inward investment in the UK, as it becomes a less appealing place to do business relative to the rest of Europe, as well as reduced corporate profitability and pressure on consumer disposable incomes.
As such, it could be argued that the profitability of UK-focused companies may be hurt somewhat, with a Labour government being seen as less pro-business than the incumbent one and having the potential to cause delayed investment due to the uncertainty that seems likely to be present.
The Impact On London
Perhaps the biggest impact of Ed Miliband being Prime Minister could be on London. His perceived negativity (compared to David Cameron) towards the financial services sector could cause banks and other financial services companies to consider their investment in the capital. This would clearly be bad news for the wider UK economy and, with a mansion tax and a higher rate of taxation on high earners in the pipeline, so-called ‘wealth creators’ may decide that New York is a better option for the next five years.
Looking Ahead
With the UK economy currently growing at one of the fastest rates in the developed world, it is likely that the stock market would prefer no change when it comes to the UK government. As such, an Ed Miliband-led government will inevitably cause a degree of uncertainty and could cause share prices to fall. Furthermore, Labour’s policies are more left-leaning than those of the Conservatives (in terms of taxation and redistributing wealth), and this may result in less investment in the UK economy, thereby causing a lower rate of economic growth.
However, when it comes to threats to your ISA, Ed Miliband is unlikely to be the major one. Certainly, he may change the structure of ISAs and cause investor sentiment to weaken somewhat, but the potential for further challenges in Ukraine, the Middle East, deflation, a weak Eurozone and a housing bubble still present greater threats to you and your ISA. As such, now remains a great time to invest for the long run.