Cebr comment on the implications of the UK General Election 2017
‘Whoever tries to form a government has perhaps the most difficult mandate of any government since 1945’
‘Increased economic stability at the price of longer term political instability’
‘The luck of the Irish…’
The political results of the election
I’ve never before had the privilege of commenting on a UK General Election from abroad and it is bizarre.
I should point out that I am here in Washington DC, not as a preemptive move against a Corbyn victory, but to attend the Atlantic Council which starts later today. In the District of Columbia, the UK election was nowhere near the biggest political story yesterday – which was James Comey’s (sacked Director of the FBI) evidence to the Senate. He hasn’t quite convicted President Trump but he has damaged him badly.
Seen from the US, the British appear to be revealing an enormous sense of entitlement in their policy preferences. The Brits appear to be looking for something to be done for them and expecting someone else to pay rather than working out how to do it or pay for it themselves. Meanwhile Corbyn seems from a US angle to be offering the worst of all worlds, combining Trump’s Russian links with a kind of socialism that Americans find highly suspect.
The fact that the Conservatives have more seats than any other party has been greeted with a degree of relief, though the fact that so many voted for Corbyn has not done much for the UK’s reputation.
Whoever ends up forming a government has perhaps the most difficult mandate of any British government since 1945.
It looks as though a government can be cobbled together between the Conservatives and the Ulster Unionists but one assumes that the price is likely to be heavy spending in Northern Ireland and presumably favourable treatment for Northern Ireland in the Brexit negotiations. It seems likely that Mrs May will be forced to resign by her own party, having called an unnecessary election and having fought an excessively personalised campaign which has failed.
The new government has four interlinked priorities: dealing with terrorism; negotiating Brexit; rebalancing the UK’s fiscal policy and paying for an aging population; and keeping economic growth going against a promise to reduce migration.
The terrorist challenge
The terrorist challenge is most serious. The good news is that the atrocities in London and Manchester seem to have provoked a serious response from the Muslim community against the jihadis on a different scale from before. The new government will need to build on this, keeping the vast bulk of the Muslim population (who are in no way terrorist supporters) on side while isolating the extremists. It is likely that anti-terrorism budgets will have to be increased substantially to pay for surveillance which will have to take place on a much large scale than has been seen until recently. There may also be increased restrictions on digital providers which might slow down the growth of that critical part of the UK economy.
Brexit
Meanwhile the Prime Minister has to negotiate Brexit with European governments who risk misinterpreting the recent economic boost from a short term boom in world trade as evidence that their competitive and Single Currency based problems are behind them. I don’t believe that the short term recovery in the European economy has been sufficient to resolve Europe’s structural problems but the danger is that it will lull governments into a false sense of security.
The election gives the UK a more difficult negotiating position for Brexit. Obviously one hopes that there will be a deal but even before the election the UK’s negotiating position was much weaker than it would have been had the UK waited until the Europeans needed a new treaty and there is always a danger of miscalculation on both sides. It is likely that the negotiations, due to start in days, will have to be delayed.
It now looks much more likely that the Brexit outcome will be closer to a Single Market deal than previously seemed probable, but there could yet be a second referendum on Brexit which on last night’s voting patterns might reverse it. There may also be another election in the short term, though again last night’s evidence will make any prime minister thinking of holding an election think more than once….
If the other EU governments were really clever they would make the UK an improved EU membership offer that might well be accepted but one suspects that there is too much institutional rigidity for this to happen.
Fiscal policy and paying for the aged
Sorting UK fiscal policy while paying for an aging population will be tough, because the country is showing signs of ‘austerity fatigue’ even though it hasn’t really faced proper austerity yet. The wealthier groups in the UK are near their taxable limits, while income squeezes on poorer groups mean that they will resist higher taxes. Although there is some scope for flexibility on the speed with which the deficit is reduced, much of the leeway here has already been used up by the past two Chancellors. And the country has nowhere near sorted out the problem of paying to look after older people who can no longer look after themselves. When the Conservatives bravely raised the issue during the election campaign the response was so aggressive that they were frightened off.
There is one ‘magic money tree’ left which has not yet been cut down – public sector productivity and costs. When Cebr last did the calculations a year ago, the figures showed that public sector productivity had risen by a measly 1.3% over the entire 16 year period from 1997 to 2013 compared with a rise of 20.7% for the whole economy over the same period. Given the scale of technical progress over this period, this abysmal performance suggests that there is some scope for working on the fiscal balance through improving public sector costs. But politicians are not generally good managers and the best civil servants don’t get promoted for providing public services efficiently.
Migration and growth
The UK’s economic policy since the middle of the Blair years has been to rely on strong boosts to the labour force from highly motivated migrants who have generated economic growth, raising GDP levels and hence providing tax receipts that have financed the public sector. In recent years this has been especially important as the UK digital and creative sector, the so-called Flat White Economy, been the strongest growth driver, fuelled by skilled migrants and the impact of diversity on creativity. In 2016, according to the best data currently available, this accounted for half of the UK’s GDP growth.
The Conservative manifesto plan to reduce migration to ‘tens of thousands’ would have derailed this strategy and might have reduced growth down to very sluggish levels while causing borrowing to rise. The uncertainties over Brexit have already reduced net migration but if this continued on a persistent basis not only would growth fall to very low levels (1% or less) but the budget deficit, even with public expenditure restraint, would have started to rise again. The election result means that the imposition of this plan is now fairly unlikely, which is good news for the economy.
Increased economic certainty…
Oddly the election provides a degree of economic certainty that previously didn’t exist. A hard Brexit now looks much less likely as long as the other EU governments don’t miscalculate and try to take advantage of the UK’s weakened political position.
Continued UK Single Market membership with continued migration look likely for the foreseeable future.
There now seems little chance of a second Scottish independence referendum risking the splitting up of the country.
When the markets have had time to digest the shock result, one suspects both a stronger pound and a rising FTSE.
But reduced political certainty….
But the price of this economic certainty is increased political uncertainty.
The UKIP minded part of the electorate will be resentful when they realise that Britain will largely remain in the EU.
The extreme left will continue to run the Labour party and on last night’s showing must have a serious chance of winning the next election.
Meanwhile the Tory party is likely to have a divisive leadership election and might risk splitting.
The luck of the Irish….
The biggest winners of the election are the Irish. Northern Ireland should benefit from plenty of extra spending in the coming years while any Brexit that does happen will be designed to minimise cross border disruption…..
Douglas McWilliams
Washington DC
9 June 2017