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?

Eight years on

Eight years on from the Brexit referendum, the world looks a very different place. While in 2016 it was the UK which had to deal with an onslaught of rampant populism, it is now a feature of the political landscape across the industrialised world. The European Parliament elections made it clear that electorates across the EU are running out of patience with centrist governments which have failed to deliver on promises to make life better for long-suffering voters (chart above). Meanwhile on the other side of the Atlantic, Donald Trump has every chance of getting back into the White House as he feeds on the discontent of an America unsure of its place in the world.

As we head towards a UK general election that looks set to banish the Conservatives into the political wilderness, it is possible that the UK may be one of the few western democracies about to swing back towards the political centre. Yet it is notable that the policy which helped Boris Johnson win an overwhelming majority in 2019 has not even figured on the 2024 campaign trail. The Tory party cannot bring itself to admit that its signature policy has failed while the Labour Party is so fearful of alienating voters in Red Wall seats that it simply will not go near the issue of Brexit. But it is the Tories who will have to carry the can, since this is a policy with which they are closely associated, and spent so much political capital delivering the hard Brexit that many of us warned against that it has become an albatross around their neck. Moreover, it absorbed so much political bandwidth that the party was unable to deal effectively with the other tasks involved in governing. This included managing the pandemic and ensuring compliance with the basic standards required for governance in modern democracies which is one reason why they lag so far behind in the polls (chart below).

Look beyond the 2024 election

However, just because the electorate is about to hand the keys to Downing Street to a party of the centre-left does not mean that they are about to repudiate some of the more extreme versions of nationalist politics. If the performance of Reform UK in the polls is to be believed, quite the opposite. Recent history suggests that political turnarounds are very much in fashion. Back in 2021, not long after Labour had taken an election hammering and lost one of its safest seats in a by-election, it seemed that the centre-left was on the ropes. When the SPD unexpectedly won the German election in 2021, it was not long before sentiment turned against them, while Emmanuel Macron’s 2022 election triumph is a distant memory as the right-wing Rassemblement National is currently the most popular party ahead of the snap French parliamentary election. Life, as they say, comes at you fast. And just as Brexit was a cry of rage against the prevailing status quo in 2016, so we should interpret any (potential) Labour landslide as a rejection of years of Conservative government incompetence rather than a general buy-in of what Labour are offering.

If a week is a long time in politics, as former UK PM Harold Wilson once remarked, a couple of years is an aeon. Thus, to the extent that politics is a long game, we have to look beyond the upcoming election and think about what the future of politics will look like. Labour’s ability to deliver any form of economic improvement over the next five years will determine whether they stand a chance of winning a second term. Labour will have to manage expectations in such a way that they can deliver some progress and that they are not swept away in a tide of disappointment later in the decade. But if they do not deliver, what might the options look like in five years’ time? This in turn depends on how the Conservatives respond to what currently looks like being a very heavy defeat. Will they double down and move further towards the populist end of the spectrum? Or will they do what Labour did in the wake of their heavy defeat in 2019 and tack back towards the political centre?

It is currently difficult to envisage the latter option, partly because many of the more moderate members of the parliamentary party were purged by Boris Johnson in 2019. The alternative is thus a shift towards right-wing populism of the sort espoused by many prominent government ministers of recent years, and the non-negligible possibility of a tie-up with Nigel Farage’s Reform UK. It may sound far-fetched – a wild fantasy dreamed up the political commentariat – but as the rise of RN in France and the AfD in Germany illustrate, if the traditional parties cannot enthuse and inspire voters, they will look for alternatives.

The case for tax reform

It is thus evident that Labour will have to deliver something tangible in order to pacify the electorate and generating faster growth is a priority. In contrast to 1997, the economy's trend growth rate has slowed considerably (chart below) which is excerbating the fiscal constraints under which the government will be forced to operate. Labour's manifesto offers nothing particularly interesting in terms of economic thinking, with a very limited set of fiscal promises. Obviously, Labour does not want to give too many hostages to fortune but if I were the new Chancellor, one of the first things I would do is to announce a review of the tax system, building on the excellent and under-appreciated Mirrlees Review of 2011. One reason for doing this is that the government needs to quickly find some fiscal space. In much the same way as the Blair government announced reform of the monetary policy framework in 1997, a fiscal reform is overdue. It may not deliver a significant amount of revenue immediately but if a new government is serious about tax reform, it may be able to open the fiscal taps halfway through its first term on the basis that the returns will come through later.

What might tax reform look like? It certainly will not be a radical big-bang on day one. It is likely to take the form of a Royal Commission which will report after two years with a view to implementing changes in 4-5 years’ time. A more detailed look at possible measures is a subject for another day, but one idea whose time may have come is a land value tax which is a more economically efficient form of property tax than is currently in place today. There is also scope for reforms to the taxation of savings, carbon, wealth, corporates – you name it, and it can be done better. There is also a political dimension to this. Shifting even a tiny bit of the burden away from wage earners (i.e. voters) onto less heavily taxed areas of the economy would go some way towards making voters feel a bit better about things, without necessarily reducing the tax take.

Last word

But whatever the next government wants to do on the economic policy front would be made a lot easier if there were fewer trade frictions with the EU. Although Labour has promised that the UK will not rejoin the EU, it does want to “reset the relationship and seek to deepen ties with our European friends, neighbours and allies.” While it has ruled out rejoining the single market, it does want “to improve  the UK’s trade and investment relationship with the EU, by tearing down unnecessary barriers to trade.” Whatever one’s views on Brexit in 2016, and whether or not they have subsequently changed, the UK does need closer economic and political ties with the EU than we have had in recent years. Those politicians who promised a brave new post-Brexit economic world have been found out. It is time to hit the reset button.

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.