UK: Gov't Faces Stark Choice On Tax Hikes Amid Slumping Support
The government is walking an increasingly difficult political tightrope as it faces a bleak fiscal outlook while also attempting to shore up its public support. As noted earlier (see 'STIR: Under 50bp Of Cuts Priced Through Dec, NIESR Note Fiscal Issues', 07:44BST), the National Institute of Economic and Social Research (NIESR) think tank published a report on 6 August outlining the significant fiscal shortfall Chancellor of the Exchequer Rachel Reeves faces ahead of the autumn Budget. The NIESR exec summary notes: "The Government is not on track to meet its ‘stability rule’, with our forecast suggesting a current deficit of £41.2 billion in the fiscal year 2029-30. Substantial adjustments in the Autumn Budget will be needed if the Chancellor is to remain compliant with her fiscal rules."
- NIESR Deputy Director for Macroeconomics Stephen Millard told the BBC, "If [Reeves] wants to raise £40bn then I think one of the big taxes [VAT, employee National Insurance or income tax] is going to have to be raised. If she does that, then it will break the Labour promise about raising taxes on working people."
- Support for the governing centre-left Labour party has slumped since the July 2024 election (see chart below). The right-wing populist Reform UK of Nigel Farage has surged into first place in opinion polls, with its numbers (enough to potentially provide it a Commons majority in 2029) proving 'stickier' than many pundits anticipated.
- With Reform UK benefiting from significant public anger at Labour's handling of immigration and crime, breaking its manifesto promises on tax could further damage the gov'ts standing ahead of elections to the Scottish and Welsh parliaments and English local councils in 2026.
- Betting market data from Smarkets shows a 66.3% implied probability that PM Sir Keir Starmer is out of office by 2029, the year of the next general election. A poor set of results for Labour in 2026, engendered in part by tax hikes, could see Starmer's odds of political survival drop further. Deputy PM Angela Rayner, sitting further to the left of Starmer, is seen as the bookmakers' favourite to be the next Labour leader.
Chart 1. General Election Opinion Polling, % and 6-Poll Moving Average
Source: YouGov, More in Common, Opinium, Techne, Find Out Now, Freshwater Strategy, BMG, Survation, Lord Ashcroft Polling, Focaldata, JL Partners, Whitestone Insight, Deltapoll, Stonehaven, We Think, MNI
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JAPAN: LDP-Komeito May Struggle To Hold Onto Upper House Majority-Poll
The latest seat projection opinion polling ahead of the 20 July election for the House of Councillors shows PM Shigeru Ishiba's conservative Liberal Democratic Party (LDP) on course to lose a significant number of seats, and potentially for the governing coalition (alongside the Komeito party) to lose its overall majority in the upper chamber of the Japanese National Diet.
- The poll for Mainichi Shimbun, carried out 5-6 July, projects the LDP to win between 34 and 46 of the 124 seats up for election. The House of Councillors has 248 seats in total, with half of the seats up for grabs every three years. In the previous election in which these seats were up, the LDP won 57 seats, meaning even at the higher end of the projection range, the party is on course to lose ground.
- Among the seats not up for election this round, the LDP and Komeito hold a combined 77 seats. As such, if the parties perform at the lower end of the projection range, they would come away with as few as 113 seats, short of the 125 needed for a majority. This would leave the gov't in the minority in both chambers of the Diet and could pose a threat to PM Shigeru Ishiba's position at the head of the LDP.
- The poll shows the right-wing populist Sanseito on course for significant gains, winning a projected 9-17 seats, up from one presently. After a strong performance in the Tokyo metropolitan assembly elections in June, an increased seat total in the upper chamber would cement the party's status as an opposition force rather than an upstart challenger.
Chart 1. House of Councillors Opinion Poll, Seat Projection
Source: @asiaelects, Mainichi
ECB VIEW: UBS Maintain July Cut As Baseline Call
UBS reaffirm their call for a cut at the ECB’s July meeting.
- It is very much an out of consensus view, with less than 5% odds of a July cut priced into markets at the minute.
- They note that "if there is a benign outcome in the U.S.-EU trade talks over the coming week or a decision to extend the negotiation beyond the current deadline (9/14 July), we will abandon our forecast of a July cut. However, if U.S.-EU trade tensions rise again around the deadline – a key concern on our side – the probability of a July cut would arguably rise again. At the moment, the markets seem to attach only a very low probability to this risk scenario and price just -1.2bp for July. We find this surprising".
- Elsewhere, a reminder that Citi have reiterated a receive July ECB-dated OIS recommendation.
CROSS ASSET: Bonds Off Lows As Oil Softens & USD Rally Extends
Headline flow remains light as the bid in the USD extends and core global FI markets tick away from session lows.
- Cross-market cues likely remain at the fore.
- The only real news of note that we have seen comes via RTRS sources adding to the speculation that OPEC+ will conduct another similar-sized production increase in the coming months, which has generated some light selling pressure for crude oil.
- This will have allowed bonds to stabilise/bounce from lows.
- Elsewhere, European equity index futures edge away from highs, providing further support for Bunds.
