Changing of the guard

For once the pollsters got it right. Unlike in 2017 and 2019 when they predicted, respectively, a handsome and narrow Conservative victory, the 2024 election produced the landslide Labour win that was long expected. Back in 2021 it did not look likely that Keir Starmer would be leading a government in Downing Street, particularly after Labour lost one of their safest seats in a by-election. Not for the first time, I was proved wrong, but at least it offers a chance for a policy reset after years of fractious governance.

Labour’s position less secure than it looks

The 2024 result was a rejection of the Conservatives rather than a ringing endorsement of Labour. Indeed, while it won an overwhelming majority of seats, the roots of Labour’s win were not deep. A large parliamentary majority, which gave them two-thirds of the seats, was achieved with just one-third of the votes on a very low turnout slightly below 60%. It is not the lowest turnout of recent times – that occurred in 2001 when it dropped to 59.4% – but things are different today. In 2001, the electorate voted for an incumbent government and was expecting more of the same. In 2024, however, the electorate is voting for change and it matters whether they are simply voting against the previous government as a protest or in favour of the alternatives on offer.

Without wishing to strike a discordant note after one of the least popular governments of modern times has been banished into history, the narrow foundations of Labour’s win do matter. Although Labour appears to have a strong mandate, which many advocate as a reason to set out bold policy prescriptions, unpopular measures will simply encourage those who sat out the election last week to vote against them next time around. And there is no guarantee that Reform UK and the Conservatives will split the vote as they did on 4 July. Indeed, the combined vote of the Tories and Reform UK was larger than that of Labour.

This makes it all the more imperative that Starmer’s government gets the big things right quickly. Making voters lives better is the one thing that will raise the chances of a second term in office – a second term that will undoubtedly be required to properly fix many of things in the economy that require improvement. At least the new government is comprised of members that share the experiences of the people they represent. For example, only 4% of the cabinet was educated at a private school vs. 63% of the previous one. If accusations of being out of touch plagued the Conservatives, it is not an accusation we can so easily level at Labour.

What next for the Conservatives?

After a chastening defeat, which produced the worst result by the Conservatives since their foundation in 1834, and the worst by either of the two main parties since 1931 (when Labour won just 52 seats), a period of soul-searching is in order. Not only does the party need a new leader following the resignation of Rishi Sunak, it needs to decide what it stands for. The party has become increasingly out of touch since the Brexit referendum in 2016, burning through five prime ministers and spending more time pandering to right-wing MPs than listening to what voters want. It failed to improve public services – indeed their deterioration can be traced back to the austerity policy introduced by George Osborne in 2010; it failed to reach its immigration targets and it failed to make Brexit work.

At least the more reflective MPs recognised that fact as they trooped out of office yesterday (Sunak and Chancellor Jeremy Hunt among them). But is that shared by the 172,000 members of the Conservative Party, who will be responsible for choosing the next leader? The Tories made a mistake in tacking to the right after their defeat by Blair’s Labour Party in 1997 which kept them out of office for 13 years. Although circumstances are different today, the general view is that elections are won from the centre ground. A tie-up with Nigel Farage, as proposed by many excitable political commentators recently, would probably be a mistake. If Labour are smart (and they are), they will know that reducing NHS waiting lists and improving the quality of public services will draw the sting out of the immigration debate. The Tories would be well advised not to go too far down that path.

The fate of the smaller parties

The Liberal Democrats returned after three drubbings to record their best performance in terms of seats since 1923 (72). The Greens outperformed expectations to win four seats in parliament – a record for them – while Reform UK came from nowhere, grabbing the headlines with five seats and a 14.3% vote share. This was largely down to the charisma of Nigel Farage – love him or loathe him, he knows how to whip up the populist vote. Farage and his band of fellow travellers will be noisy and consume a lot of political oxygen in the months ahead. They are too small to be politically relevant but they will have an influence at the margin by influencing the debate in parts of the Tory party as it ponders its future.

The SNP had a bad day in Scotland, going from the dominant political force holding 48 of the country’s 59 seats in 2019 to just 9 of 57 today. This is the result of many domestic factors, including allegations of corruption at the top of the party, but the truth is that independence is no longer the burning issue it was a decade ago. This will at least make Starmer’s job a bit easier as he will no longer have to contend with demands for an independence referendum for the foreseeable future.

Stacked in-tray: What to do?

Aside from the high profile issues of tackling the NHS, and overcrowded prisons which Starmer mentioned in his first press conference yesterday, reform of the social care, welfare and benefit systems are areas where the government will have to act quickly. It has long been recognised that the rollout of the Universal Credit system has been plagued with difficulties, particularly as people migrate from legacy benefits to the new system. Access to welfare benefits is increasingly wrapped up in red tape as claimants are subject to conditionality requirements, while there are mounting problems in accessing disability benefits as regulatory changes are introduced. In 2019 I advocated reducing the taper rate on Universal Credit as a gesture of goodwill to those voters who lent their votes to the Tories (which in fairness the government introduced in 2022 but more can be done here), and reducing the time between claiming benefits and receiving payments. If the government wants to improve the lot of the poorest in society, there are low cost wins to be had.

Final thoughts

As parts of Europe swing to the right of the political spectrum, notably France which goes to the polls today, the European landscape will become more fractured. As a result the UK may stand out as a beacon of stability after a tumultuous few years. That does not mean that the UK should expect a huge wave of foreign investment immediately but it may at the margin become less unattractive vis-à-vis other EU markets. Building some bridges back to the EU will definitely help.

Undoubtedly, the new government will have to prioritise on policy and it says that one of its primary tasks is to boost growth. In truth, this will be hard to achieve – there are so many factors which impact on performance that are outside its control. Not having made many tangible economic promises, it will be difficult to underdeliver, but that is not enough – voters want a bit of stability, and a return of the feelgood factor. Don’t we all?

Light the blue touchpaper

Rishi Sunak’s announcement last week that the UK is to hold a general election on 4 July represents the fourth major UK plebiscite since I started this blog in 2016 and the sixth in 10 years (including the 2014 Scottish referendum). Of them all, the 2024 election feels the most necessary. The Conservatives have occupied Downing Street since 2010, chewing up five prime ministers, while contending with the fallout from Brexit, the pandemic and a rapidly shifting geopolitical world. After such a gruelling run, they look tired and bereft of ideas.

It happens: The business of governing is hard at the best of times, and these are not the best of times. All governments run out of ideas eventually but this particular incarnation of the Tory party ran out of steam earlier than most. While it can point to mitigating circumstances in the form of the pandemic, it has made a series of unforced errors that have contributed to its unpopularity. Although it made mistakes prior to 2016 (who didn’t?), the Brexit outcome changed the calculus. The government chose to accept a close-run advisory plebiscite as a winner takes all contest with no plan how to deliver. Not only did it waste considerable amounts of political capital trying to reach an accommodation with the EU but it failed to implement any of the changes that were promised by Brexit proponents. Even more egregious was its failure to understand the lessons of the 2019 election. The thumping majority gained by Boris Johnson was not a vote in favour of populist nationalism, as many in the party believed, but the imprimatur of an electorate willing to believe Johnson’s claim that he could finally get Brexit done and – equally importantly – was a repudiation of the policies espoused by Jeremy Corbyn.

There are no guarantees in politics but it is a raging certainty that Labour will win the next election. Latest bookmakers odds put the probability of a Labour win at 89.8% versus 4.3% for the Tories (and a 14.9% likelihood of a hung parliament). Although bookies odds reflect the weight of money being placed rather than an objective assessment (see this post from 2019), the fact that a record number of 83 Conservative MPs have so far opted to stand down, rather than contest their seats in July, is one indication of the party’s pessimism. Electoral Calculus currently estimates that Labour will win 479 seats (see below) which would give it the biggest majority (308) of any government since 1918 (bar the emergency National Government of 1931). For the record, I would be astounded if such a majority is achieved - Labour will do well to emulate Blair's 1997 landslide.

Defining the battleground: Recapturing the feelgood factor

The economy will be one of the key areas where Labour and the Conservatives will lock horns during the campaign. Sunak’s quite literal damp-squib announcement on Wednesday argued that: “Our economy is now growing faster than anyone predicted, outpacing Germany, France and the United States. And this morning it was confirmed that inflation is back to normal. This means that the pressure on prices will ease, and mortgage rates will come down. This is proof that the plan and priorities I set out are working.”

This is not wholly wrong, but not wholly right either. It is true that UK growth outpaced the three other countries in Q1 2024 but since 2016 has outpaced only Germany. In any case, it is not just the rate of growth which matters: IMF data suggest that UK real incomes per head are almost 30% below US levels and 12% below German levels (chart above), with the rankings not having changed much since 2010 (indeed, they have widened relative to the US). One potential cause of the dissatisfaction with government in recent years has been the extent to which voters do not feel better off. It is important to recognise at the outset that this is not simply a problem in the UK: It is an issue across much of the industrialised world, notably Europe. But this cuts no ice with voters who, not unsurprisingly, are focused on their own domestic issues. The Conservative government of 1979 to 1997 delivered real household disposable income growth averaging 2.7% per annum, while the Labour government of 1997 to 2010 presided over annual growth of 2.5%. Since 2010, this has slowed to 1.3% (chart below).

This is a reflection of changed circumstances following the GFC in 2008, with the slowdown in productivity growth at the heart of the problem, slowing to around 0.5% per year versus 1.5% pre-2008. The Productivity Institute has identified three key reasons for the UK’s sluggish performance in this regard: (i) Underinvestment, in both physical and human capital; (ii) Inadequate diffusion of productivity-enhancing practices from the innovation-driven sectors areas to the wider economy and (iii) Institutional fragmentation and lack of joined-up policies, aggravated by the dichotomous arrangement whereby the policy formation process is highly centralised but the institutional framework responsible for translating this to the wider economy is  highly fragmented. None of these will be an easy fix, but they will require a root-and-branch reform of the policy formulation process. Market solutions alone will be insufficient to deliver the desired outcomes, and certainly not on a five-year horizon.

The fiscal constraint

One of the key issues that voters care about is the state of the UK health and social care sectors. Public dissatisfaction with the NHS reached an all-time high in the 2023 Social Attitudes Survey, reaching 52% compared to the previous peak of 50% in 1997. Ironically, given the current government’s desire to reduce taxes, almost half of voters support a policy of raising taxes to provide additional NHS funding. With an ageing population placing increased strain on the health services at a time when post-pandemic strains and funding challenges have raised pressure on the system, there may be little option but to test the public’s willingness to pay higher taxes. The alternative may be to explore more radical funding options, such as a continental European-style social funding model; increased hypothecation; raising NHS charges or relying on greater private sector provision.

None of these are likely to be very palatable to the electorate but with the UK’s debt-to-GDP ratio already at its highest in 60 years, at around 100%, and competing demands from defence and managing the green transition, the fiscal constraint is increasingly biting. It is thus clear that the UK will require a serious debate about its policy choices in the next parliament. At the very least a radical reform of the tax system should form part of the political and economic debate with nothing off the table. Even if they are not adopted, it is necessary to have a debate about the pros and cons of wealth taxes and land taxes, if only to widen the nature of the debate.

Final thoughts

In some ways, the 2024 general election will not be a good one to win. Many challenges lie ahead and they will require the next government to make some unpopular choices. Just as 1979 marked a break with the post-1945 political consensus, so it is time to make a break with the post-1979 settlement which has peddled the view that it is possible to reduce the size of the state and reduce taxes while simultaneously driving up living standards. Achieving the latter will require compromises with regard to the former and more radical thinking on a whole range of issues. But as this bitter election campaign gathers momentum, voters will do well to remember that there are no quick fixes to the economic problems facing the UK. Liz Truss reckons there are Ten Years To Save the West, and while I am not in the habit of taking lessons from one who failed to outlast a lettuce, ten years to fix the economy might not be too far wide of the mark.

The (un)changing face of politics

Although I have tried hard to steer clear of politics on this blog over the last year or so in order to focus on the economics, in many ways the two subjects are intertwined. The onset of the global financial crisis in 2008 raised a number of questions that politicians have failed to answer, with the result that the discontent which was already bubbling under the surface spilled out in ways that mainstream politicians have been unable to counter. Populists and authoritarians have had a field day, giving us Orban in Hungary; the Law and Justice Party (PiS) in Poland, not to mention Trump in the US and the Brexit crowd on this side of the pond. But the complexities of real life conspire to confound the simple appeal of many populists, with the result that PiS is a diminished (though still important) force in Polish politics; Trump is out of office (for now) and the gang of zealots that inflicted Brexit upon the UK seem to be fading away into the background.

Indeed, for a long time the British government has appeared to be drifting inexorably to the right, engaging in culture war rhetoric rather than attempting to tackle some of the bigger economic and social problems facing the UK. The sacking of Home Secretary Suella Braverman (the reasons for which you can read here) perhaps marks a watershed as Prime Minister Rishi Sunak realises that the further towards the fringes his party goes, the less likely they are to escape a major trouncing at the next general election, which is expected to be held anytime in the next 6-12 months. The surprise return of former PM David Cameron as Foreign Secretary is the big news, both at home and abroad, and is a sure sign that Sunak is attempting to drag his party back towards the centre before it is too late. If nothing else, it may reassure Tory voters in the shires who have increasingly found the current incarnation of the party unpalatable.

Whether or not Cameron will be the right person to convince the electorate is moot. After all, he is widely blamed for losing the Brexit referendum and ushering in a series of prime ministers who proved themselves more inept than their predecessor (Sunak broke that trend, although he did follow Liz Truss, whose main claim to fame in the eyes of many voters is that she was outlasted by a lettuce). And in an irony that has not gone unnoticed on social media, since Cameron is no longer an MP, he can only enter government by sitting in the House of Lords and cannot be held to account by the House of Commons. Remind me again, but wasn’t one of the benefits of Brexit that we could get rid of unelected bureaucrats?

While it is certainly possible – indeed likely – that changing the composition of his government will allow Sunak to eat into Labour’s polling lead, which has averaged 19 points over the past year (chart above), will voters be sufficiently pacified to draw a line under the last seven years of chaos? If the evidence which is emerging from the Covid inquiry is any guide, Conservative politicians of recent years have a lot to answer for. The tales of incompetence which emerged under Boris Johnson’s leadership will not easily be forgiven or forgotten, highlighting the extent to which governance has been compromised. The Truss government’s short-lived but chaotic tenure severely damaged the Conservatives’ reputation for economic competence while politically contentious decisions such as the cancellation of the northern leg of the HS2 rail project will do little to convince voters in the north that the Conservatives deserve another term in office.

It's the economy stupid

It is only four years since the last election and a lot of water has since flowed under the bridge. But one of the great consistencies of the intervening period has been the Conservative government’s failure to interpret the electorate’s mood in 2019. It did not win a huge mandate because the electorate was concerned about immigration or “wokeism” but rather because it wanted an end to the Brexit wrangling, which Johnson promised, and because Jeremy Corbyn was viewed as an unelectable leader of the opposition.

Matters have been compounded by the fact that the government has failed to deliver on its levelling up agenda – not altogether a problem of its own making, since the pandemic drove a coach and horses through that policy. It has also presided over the fastest rate of inflation in four decades – again the result of forces outside its control. However, it has doubled down on Brexit despite evidence that this is an increasingly unpopular policy, and voter satisfaction with the NHS has fallen to record lows, which is increasingly blamed on government policy (some of which is fair criticism, some of which is not).

Brexit is not to blame for many of the economic ills that the UK now faces, although it does compound them. Dissatisfaction over the state of public services is to a large extent the consequence of the austerity policy introduced by the Cameron government, which resulted in a two percentage point decline in the central government contribution to local authority financing (chart above). Increased unhappiness over the provision of services by public utilities is partly due to a lack of private sector investment following the privatisation of many of these utilities in the 1980s and 1990s. A policy of less government and more private sector involvement is thus not perceived by voters to be acting in their best interests. The debate is obviously more complex than that, but as I have pointed out many times before, the UK cannot afford to operate the same economic model as it did between 1979 and the onset of the GFC in 2008. Demographics are increasingly a headwind and there is no North Sea oil to fund tax cuts. Like all western economies, the UK looks set to experience a sharp slowdown in growth and a commensurate slowdown in the pace at which living standards improve.

As we look ahead to the next election, the party that does best will be the one that has a credible plan to tackle many of the UK’s underlying economic ills. How this will be done is a subject for another time. But changing government personnel does not sound like the game-changer that the UK needs. Forget culture wars and wokeism – the next election will be fought against the backdrop of the economy. Or as Bill Clinton’s strategist James Carville put it in 1992: “it’s the economy stupid”.