Pound Sterling Faces Sharp Downside Risk Under "Polanskinomics"

Above: Zack Polanksi's Green Party are expected to win Thursday's by-election. Photo: David Mirzoeff/The Green Party.

Polanski's populist economic agenda poses significant risks to the British pound, warns an economist.

The Green Party leader Zack Polanski took aim at the UK's fiscal rules in a major speech issued midweek in which he laid out his party's economic agenda.

The new party leader said the government should abandon existing financial disciplines, saying "the government should change these failing fiscal rules" in order to "exit the bond market doom loop."

In their place, he proposed a panel of independent experts - "fiscal referees" - and suggested that "more up-to-date multiplier assumptions could create greater fiscal space."

He also said that "proposals such as transforming the Office for Budget Responsibility into the Office for Fiscal Transparency are one of the suggestions the New Economics Foundation are making and are definitely worth examining."

"I would judge that GBP & Gilt markets would react exceedingly negatively to this ever seeing the light of day - squeezing UK living standards very significantly," says Simon French, Chief Economist at Panmure Liberum.

Bond markets, where institutions lend to the British government, are already nervous about the UK's significant debt pile and Chancellor Rachel Reeves has had to deliver two painful tax-heavy budgets to keep the fiscal trajectory on track.

Market confidence rests heavily on the clear fiscal rules and OBR oversight that ensures government fiscal discipline. Polanski argues for these existing guardrails to be removed.

The stakes of a confidence crisis in British fiscal discipline are high as economists frequently warn that if lenders were to shun the UK government, bond yields would spike and the pound would fall.

Economists are taking note of the Green Party's policy platform as it regularly beats the current ruling Labour Party in the polls, while membership has surged after it won the recent Gorton and Denton by-election.

In the short term, a clear risk is that the gravitational pull on Labour's left flank induces Chancellor Rachel Reeves and Prime Minister Keir Starmer to entertain some of the Greens' policies.

"The current concern for markets is who would replace the Prime Minister if he were to go. Angela Rayner and Ed Miliband are amongst the bookies' favourites - but a lurch to the left wouldn't go down well with bond markets. In this scenario, we would likely see further downside pressure on sterling and a steepening at the long end of the yield curve amid concerns about increased public borrowing," says Marc Cogliatti, Head Markets Risk Strategies at Validus Risk Management.

Longer term, the bigger risk is that the Greens' populist platform holds sway with voters, and a coalition that includes the Greens is in power after the next election.

UK total debt is at its highest outside of the two world wars.

Polanski delivered his address to the New Economics Foundation in London, framing the platform around what he called the need to end "rip-off Britain."

At its core, the programme proposes rent controls, the renationalisation of water, capped energy bills, equalisation of capital gains tax with income tax, National Insurance extended to investment income, and a new annual wealth levy on assets above £10m.

French, while crediting Polanski for "laying out his thinking", which he said was "always worthy of praise", offered a pointed structural critique of Polanskinomics.

He described it as an "anti-abundance agenda" built on the assumption that supply in housing and energy markets is inelastic, meaning price caps would deliver relief to consumers without reducing investment or worsening shortages.

The economist also said the tax proposals assume high-net-worth individuals and investors are "inelastic in residency and tax jurisdiction", that they will absorb higher levies rather than relocate or restructure their affairs.

French warned, "this type of model only works in the event of extensive capital controls and high exit barriers for people",  a framework Polanski has not proposed and has given no indication of supporting.

With Polanski establishing himself as the dominant voice on the British left, pressure is growing on the Labour leadership to respond to his agenda, particularly on cost-of-living measures.

Should Sir Keir Starmer face a leadership challenge before the next general election,  and be succeeded by a figure more sympathetic to the politics Polanski represents,  the distance between "Zackonomics" and government policy could narrow considerably.

For the pound, this is outright bearish.