This Thursday, millions of people in the United Kingdom are called to vote in local and regional elections. Its result is not expected to be favorable for the Prime Minister, Keir Starmer, since everything indicates that the Labor Party will suffer significant losses, which revives doubts about its ability to govern. Starmer, who was elected by an overwhelming majority less than two years ago, now faces the biggest test of public opinion since the 2024 general elections. And, although he has promised to continue fighting, the polls are not favorable for his formation. The result, if the polls hold true, could mark the beginning of the end of the traditional British two-party system, as the Labor Party is expected to suffer a blow against the Reform Party and the Green Party. Furthermore, a defeat will only aggravate frustration with Starmer and his management in Downing Street. Indeed, according to some predictions, Starmer’s Labor Party appears set to lose up to 90% of its 2,268 council seats up for election. The outcome will not be known this day, since it is a complex electoral process, which takes place in multiple places and the vote count extends over several days and under three different electoral systems. As analysts at Danske Bank state, «the Labor Party could suffer a significant setback, increasing pressure on Prime Minister Starmer to resign. The Conservatives are also expected to suffer substantial losses, raising questions about whether this election could mark the beginning of a transition to a multi-party system.» For Matt Britzman, senior equity analyst at Hargreaves Lansdown, «expectations of an unfavorable result for the Labor Party appear to be firmly established. A bad result would increase pressure on Starmer, leading investors to weigh whether political pressure translates into a change of fiscal course for the United Kingdom.» «The Prime Minister is facing a popularity crisis, along with growing speculation about a possible leadership challenge,» comment ING analysts, adding that «the right-wing Reform UK party is expected to do well in this election, but a good result for the left-wing Greens would likely attract the most market attention. Such an outcome could fuel speculation that the Labor Party could shift towards a more left-wing leadership, potentially reigniting concerns about fiscal sustainability.» As they explain, the logic among investors is this: «A new Labor leader and prime minister would probably mean a new chancellor of the exchequer. A new minister, under pressure to steer the party to the left and counter the threat of the Green Party, could be more supportive of public spending. This could mean new, looser fiscal rules. And new fiscal rules would probably mean more borrowing. However, we believe that a change in leadership will not materially alter the fiscal outlook or those of the Bank of England.» However, they point out that reality could be more complex. «The infamous 2022 ‘mini budget’ is seared into Westminster’s political memory. No politician wants to risk a repeat of the situation. But that is not the same as proposing a new set of fiscal rules. Leadership contenders will be under strong pressure to rule out changes.» Berenberg wonders if Starmer will remain in office and what will happen if he doesn’t. «The ruling Labor Party will suffer significant losses in the local elections this Thursday, May 7. According to opinion polls, the party’s vote share has plummeted from 40% to 19% since the last elections in 2021 and 2022. Following the defeat, Labor MPs will probably try to replace the prime minister in the hope that a new leader will improve the management of the government before the next general election in 2029,» they say. Under party rules, 81 MPs must nominate a rival for prime minister to call a grassroots vote. «The party’s left-leaning grassroots are likely to elect a candidate with a more left-wing stance than Starmer on economic policy. However, any new prime minister will have limited room for manoeuvre. The bond market will force the government to generally stick to its fiscal consolidation plan. The large number of Labor MPs who took their seats from the centre-right Conservative Party in 2024 cannot afford a shift to the left. in their policies that alienate their voters,» they add. In this sense, ING considers that the United Kingdom is not on the verge of a general election. «The next vote will not be held until 2029. However, the future of the Labor Party in three years depends on stopping the wave of votes in favor of the Greens and other left-wing parties. A major defeat in the local elections would inevitably focus attention within the Labor Party on what it needs to do to regain support,» they explain. On the other hand, regarding the complications of the result in the monetary policy of the Bank of England, they believe that political noise does not necessarily increase the chances of raising interest rates. «The short-term fiscal path – borrowing over the next one or two years – is unlikely to vary dramatically regardless of who is in charge. And, despite the war in Iran, the fiscal picture looked brighter; the structural deficit was reduced – and could still be reduced – this year thanks to the freezing of tax thresholds. This is important because it suggests that domestic politics is unlikely to significantly influence Bank of England policy. And even if it did, the next budget is unlikely to be presented sooner than expected, at the end of autumn. The bank cannot act on fiscal policy until it is formally announced. The focus will remain mainly on the energy crisis and its impact on inflation,» they say. In the long term, they see the situation becoming more problematic for the markets, but again, they suspect this will be the case whether Starmer or any other official in Downing Street. «The main fiscal rule – balancing current spending with tax revenues within three years – is currently met on paper. However, this is only achieved by promising significant tax increases, many of which will not come into force until 2029. Real per capita spending on public services is also expected to decline that year – a year, let us not forget, in which the next general election is likely to be held. In a context where the Labor Party is struggling in the polls, there will be a lot pressure to cancel or offset those plans. And that’s without taking into account the likelihood that it will be necessary to increase defense spending,» they conclude.
