CONTRIBUTORS
Michael Browne
Global Investment Strategist,
Franklin Templeton Institute
Macro
Last week was not full of cheer on Downing Street: The neighbours who live at No. 10, (the prime minister) and No. 11, the chancellor (fun fact—they work in 10 and 11 and live in 11 and 10) spent the week backtracking, having tied themselves in knots. In the previous few weeks, they had carefully prepared the ground for income tax rises that would breach their promises to the electorate made just 15 months ago not to raise income taxes. Over the past week, all of that careful work to soften the blow has evaporated. The certainty the Gilts market had hoped for is now blurred, and confidence has ebbed.
Why? To raise the basic rate on income tax for the first time since the 1970s, the government needed to spend political capital. This would have been a good investment, in our view, as it would likely have earned economic capital from the markets and helped to turn the economy around via lower interest rates. Lower rates would make voters feel better off, which would likely help to reverse the government’s disastrous poll ratings and thus win back much more political capital than spent. The government could perhaps be positioned to win the next election in 2029.
Unfortunately, on Tuesday night, someone in the prime minister’s office spent all the political capital in trying to quash a leadership challenge that may or may not have existed. With no political capital left and faced with the old-fashioned dictum, ‘you can’t spend the same money twice,’ it’s back to the drawing board to look at a smorgasbord of tax increases. The government is unable to break an election promise for fear of actually prompting a political coup. Increases to other taxes may or may not raise revenue, may or may not fulfil the fiscal rule and may or may not impact the economy in the way the chancellor might think. The chancellor and the prime minister have put party in front of country, and bond-market vigilantes will likely extract a price—which the economy will pay. The nightmare before Christmas?
Back in the real world, the disparity in wage growth came to the fore during the week: Third-quarter wage increases in the United Kingdom are running at 4.8%. This figure hides an uncomfortable fact—public-sector workers are driving wage increases. Their pay has risen 7.7% over the last year, while in the private sector, wages rose by 3.4%.1 With inflation at 3.8%,2 private-sector real pay has turned negative for the first time this year. If the budget is to be a success at the end of November, then the government will need to address spending alongside tax rises, and that would mean restraining wages.
Bonds
Bonds gave back some gains last week as the United States slowly reopened its government and thus, its economic database. We have for weeks been flying blind. But the theme of the year has been European spreads versus Germany’s Bunds. Another week and another series of lows for these spreads coming alongside a number of articles questioning whether the Merz government will actually spend its €500 billion fiscal boost at all. These questions have led to polling weakness for Germany’s nine-month-old government. Watch this space, but I think spread-betting may be over.
Equities
With the earnings reporting season winding down, the newsflow has dwindled. While for 3i, the risks of relying on the French consumer were apparent,3 a bid for ITV’s broadcasting business from Comcast (which excludes the content-creating ITV studios) initially looked a puzzle.4 Comcast has been a major shareholder in ITV since 2006, and buying into a stream of ad revenues for a free-to-air broadcaster seems very old-fashioned. But merging with their already-owned Sky facility and taking out duplicate costs could make perfect sense. There may yet be life in ‘old’ media stocks.
Parting shot
Travelling around Scotland and the North of England this week meeting clients, I was very struck by the fact that the cities that had put up their Christmas decorations already seemed and felt by far the busiest. Glasgow was the standout top-of-the-table leader, with huge displays adorning buildings inside and out. Manchester has certainly caught the bug, Edinburgh less so, and very little on show in Leeds. London, by contrast, seems to have hardly thought about Christmas at all.
But is there a correlation here between business and consumer optimism and how early the decorations go up? Or are such displays just desperate attempts by retailers and restaurants trying to drive business?
Looking at Rightmove regional house prices over the last year: Scotland and the North West are positive, as is Yorkshire, while London is negative.5 The most recent business barometer from Lloyds, showing a regional breakdown, seems to confirm these regional trends, with strong rises in the North West, Yorkshire and Scotland. London is treading water.6
While some may complain about Christmas arriving earlier every year, it appears to be an indicator of economic optimism and good cheer. The earlier, the better!
So that’s a big Ho-Ho-Ho to Glasgow!
Endnotes
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Source: Average weekly earnings in Great Britain: November 2025. Office for National Statistics. 11 November 2025.
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Source: Consumer price inflation, UK: September 2025. Office for National Statistics. 22 October 2025.
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Source: ‘3i Group Shares Tumble After Cautious Outlook.’ Dow Jones, Morningstar.com. 13 November 2025.
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Source: ‘Comcast’s Sky in Talks to Buy Broadcasting Arm of U.K.’s ITV.’ Wsj.com. 7 November 2025.
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Source: October 2025 | Rightmove House Price index. Avocado Property Agents. 20 October 2025.
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Source: Lloyds Business Barometer. Lloyds Bank. 31 October 2025.
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