When people in Britain woke up on Friday to a huge victory for the U.K. Labour Party after 14 years of Conservative rule, there was one big loss that stood out.
In 2022, Liz Truss was the country’s short-lived prime minister. She lost her seat in South West Norfolk to Labour candidate Terry Jermy by about 630 votes.
According to the news, she wasn’t expected to have to deal with much opposition since she had a huge majority before, 24,180 votes. The Financial Times said she was the first leader of the government to lose their seat in almost 90 years.
In the 650-seat House of Commons, Labour gained 410 seats and the Conservatives only gained 118. The Conservatives also lost over 40 cabinet ministers and government whips, including Defence Secretary Grant Shapps, and finance minister Jeremy Hunt barely held on to his seat.
A bad mini-budget with a tax-cutting package that sent the U.K. pound to a record low and caused a bond market meltdown so bad that the Bank of England had to step in in the autumn of 2022 was one of Truss’s legacies.
In an event that will go down in the history of the financial markets, Kwasi Kwarteng, her short-term Chancellor of the Exchequer, shocked the market with plans for £45 billion ($57 billion) in tax cuts and a huge package to help the energy market.
Truss was also famously said to look like a head of lettuce. After The Economist wrote an article criticising her government and calling her the “Iceberg Lady,” The Daily Star asked if a head of lettuce would last longer than her. The live stream showed that the lettuce would win.
He told clients in a note that the markets would not let the U.K. get away with unfunded tax cuts after the financial disaster of Liz Truss’s mini-budget in September 2022. Schmieding is the chief economist at Berenberg Bank.
“On the whole, that would also be true for Labour’s unfunded spending increases.” Many investors around the world would probably trust Labour more than the Conservatives after their Brexit messes, so Labour could get away with a little budget slip-up without interest rates going up. But there doesn’t seem to be much room for error, Schmieding said.
Investment strategist at Quilter Investors Lindsay James said, “This election might be remembered as one where, after the Truss/Kwarteng budget, the average politician became much more aware of the fiscal deficit, the debt to GDP ratio, and the ultimate fragility of the gilt market.” This is likely to stop them from borrowing money in the future, but it also makes their job of delivery a lot harder.
One good thing about the new U.K. government is that the Labour Party won a large majority, which could make Britain a political safe haven when other developed economies like France are in political turmoil, she said.
The financial markets were calm on Friday after the Conservatives’ loss, which was widely expected.
It was worth $1.2765 pound when traded against the U.S. dollar, up 0.20%. The yield on 10-year gilts BX:TMBMKGB-10Y fell by 2 basis points to 4.181%. Like other markets in Europe, the FTSE 100 index UK:UKX went up 0.3% to 8,269 points.
“This moment has been coming for a long time, ever since Liz Truss’s short-lived premiership,” Chris Beauchamp, chief market analyst at online trading platform IG, told clients in a note. “The fact that sterling didn’t change overnight shows just how inevitable this was.”
