Politicians usually moderate when in power. Britain’s Starmer could be different

On Friday, general election results showed Starmer’s Labour Party winning more than 400 out of 650 seats in the British Parliament—a landslide victory ending 14 years of Conservative Party rule.

The result was widely anticipated, but the FTSE 250 index of midsize, largely domestic stocks still jumped more than 1% in early trading. This highlights an unusual feature of this election: Many in the City of London had been openly rooting for center-left Labour. Corporate elites and the average voter both wanted to punish the party in power.

Following the 2016 Brexit referendum, the Conservatives delivered anything but the stability they supposedly represent. After they dragged out the uncertainty-inducing process of leaving the European Union—only to settle on terms that had been on offer a year earlier—a string of scandals felled ministers in rapid succession.

Enter Starmer, a former prosecutor who pushed out supporters of his predecessor, leftist firebrand Jeremy Corbyn. Starmer’s policy platform has been doggedly middle-of-the-road, emphasizing compliance with the U.K.’s independent fiscal watchdog, the Office for Budget Responsibility, while only promising tax increases on niche groups such as private schools. He has pledged to end growth-stifling austerity policies and patch up the healthcare system, but he also shelved plans for a £28 billion green-investment spree, equivalent to $36 billion.

Elsewhere in Europe, voters have rewarded candidates with bolder positions. The far right is poised to take the lead in France’s parliament for the first time since World War II. It is already in power in Italy under Prime Minister Giorgia Meloni.

Her trajectory underscores the tendency of radical political positions to moderate once they hit the reality of office. In France, investors are betting that parliamentary gridlock will block changes to the status quo.

But the U.K. could be a rare case where the leader becomes less moderate once in office.

In this election, overshadowed by yet another Conservative Party scandal and the memory of a 2022 bond-market seizure, the winning strategy was to have no clear agenda. Sure enough, protest votes carried the day, with the pro-business Liberal Democrats and anti-immigration Reform UK party performing well too.

But such victories are fragile. The U.K.’s economic growth has been mediocre, and it is unlikely to take off on its own. Starmer will need to stand for something more than uneventfulness if he is to win again in five years’ time.

His “supermajority" gives him room to swerve to the left. The state of public finances also suggests he might have little choice but to do so.

Even the Conservatives’ plans would have kept public spending much higher than before the pandemic, according to the latest OBR projections, because of a rising welfare budget and higher interest rates. Debt-servicing costs alone are forecast to remain above 3% of output for years to come, compared with 1.7% five years ago. Meeting a self-imposed rule of reducing the national debt as a percentage of the economy, which Starmer has also signed up to, would require the highest level of taxation since 1948 and onerous cuts to some departments.

As the independent think tank Institute for Fiscal Studies pointed out, the numbers don’t add up. Labour has ruled out tapping the biggest sources of revenue, including income taxes, even though the burden on average earners is lower than it was in 2010. Britain already squeezes more government revenue out of niche areas than its peers, despite having lower taxation overall.

That well may not be quite dry: Starmer could ratchet up taxes on capital gains and property. Alternatively, he could find ways around the fiscal rules and borrow more, which would likely help economic growth. Britain’s 2022 bond-market meltdown happened against the backdrop of high inflation and pension-fund quirks that are being ironed out, making it unlikely to be repeated.

A big question is whether the new prime minister’s reputation as a competent but dull centrist will let him U-turn while retaining the favor of markets. This shift would require him to make a convincing case that the money will go to productivity-enhancing investments. The alternative is that his risk-averse campaign punishes him for going beyond anything laid down in Labour’s manifesto.

Whatever happens, investors shouldn’t assume they know the real Keir Starmer.

Write to Jon Sindreu at jon.sindreu@wsj.com