A general election takes place in the UK on 12 December.
The outcome is unpredictable.
The Conservative party has strong leads in national opinion polls. But the outcome will be determined in individual constituencies. More constituencies than ever before are marginal (i.e. there is a genuine contest rather than an incumbent with an unassailable majority). And with the nation now increasingly divided on Brexit lines (Leavers vs Remainers), the outcome may hinge on how much tactical voting there is and tactical alliances between parties.
Here are three core scenarios of possible outcomes:
1. A Conservative majority. Based on national polls, this is the most likely outcome. As of 18 November, www.electoralcalculus.co.uk rates this a 66% probability. With many Conservative ‘soft Brexit rebels’ standing down, this is likely to be more homogeneous and disciplined than the current Conservative group of MPs; and new MPs are more likely to be from the Brexiter wing of the party.
2. Labour, probably with SNP support, form a government. This would depend on a big campaign surge by Labour (on the scale of 2017) and significant tactical voting. As of 18 November, www.electoralcalculus.co.uk rates some form of Labour government as a 14% probability. Whilst some moderate Labour MPs have stood down and some may lose their seats, ‘reselection’ of MPs by their local parties has been suspended due to the snap election so Labour MPs will continue to include a significant number of moderates who do not support Jeremy Corbyn or the hard left. A minority Labour Government could find its most radical reforms are restrained by its own MPs. The price for SNP support would inevitably be a second Scottish independence referendum.
3. The Liberal Democrats hold the balance of power and neither the Conservatives nor Labour can secure a working majority. As of 18 November, www.electoralcalculus.co.uk rates this as a 13% probability. Based on the last nine years, a hung Parliament certainly seems the most likely outcome. The Liberal Democrats leadership position rules out support for a Conservative government – as their policy is to stop Brexit. The Liberal Democrats would demand a second referendum and a big say over the terms of the referendum. They have also said that they would not put Labour leader Jeremy Corbyn into power – implying that Jeremy Corbyn’s resignation would be their price for supporting Labour. This could lead to deadlock; it may well mean negotiations to form a government carry on over Christmas; it could lead to a second election. The other possibility would be a time limited agreement between Liberal Democrats and Labour to hold a second EU referendum.
What do these mean for business?
We have yet to see the parties’ election manifestos; the first should be published this week. Based on what political parties have already said and our discussion with politicians and other political analysts, here is a high-level view of how our three scenarios would shape the business environment after the election:
1. Conservative majority
- A relatively hard Brexit: We would expect rapid ratification of the divorce agreement, with the aim of leaving the EU by the end of January and starting a short transition period. Over 2020 they would seek a future relations with the EU (long term deal) based on a ‘Canada style’ Free Trade Agreement, which envisages a ‘reduced friction ‘ rather than ‘frictionless’ trading relationship, which may be limited for services and is likely to involve some regulatory divergence and tariffs plus customs administration. Failure to conclude this by December 2020 and refusal to seek an extension could result in the UK trading with the EU on WTO terms in a year’s time.
- Cash and private sector delivery in public services and infrastructure: increased spending in health, police and education, at least for the short term, and shovel ready infrastructure together with some longer-term projects (ports, Heathrow, and possibly a limited HS2). Private sector delivery models will see opportunities for businesses in these sectors.
- Lower regulation: Boris Johnson’s business advisers talk about reviving the enterprise mantra of the 1980s Thatcher government. There is likely to be a presumption against new regulation, and the government has already announced a review of EU regulation with a view to pruning regulatory requirements post-Brexit. There may also be new regulatory regimes for emerging technologies, to pitch the UK as the centre for innovation.
- Limited tax changes? Boris Johnson announced at the CBI conference this week that a Conservative government would postpone its planned cut in corporation tax: maintaining corporation tax at 19% (rather than the cut to 17% planned for April 2020). The Conservative have also announced a modest increase in incentives for R&D (R&D tax credit up 1% from 12 to 13%). We wait to see if the Conservative manifesto proposes a rise in income tax thresholds if public finances allow.
- Higher wages and immigration restrictions for lower skill jobs: the minimum wage will rise to over £10 an hour. A points base immigration system will be introduced – scrapping the immigration targets and replacing with skills and salary thresholds, possibly with regional variations.
2. A Labour government
- Soft Brexit or no Brexit: renegotiation of the Brexit deal, seeking membership of customs union and single market benefits. This would then be put to a second referendum, alongside a ‘remain option.
- Cash and in-sourcing in public services and infrastucture: increased spending in health and education and investment in infrastructure (buses, HS2,) but scrapping Heathrow expansion. Outsourcing to private sector will be reversed (the extent of this may be slowed or reduced if Labour is dependent upon other parties or faces rebellions from its own MPs)
- Shift of ownership to nationalised and ‘co-operative’ models: Nationalisation of utilities (including broadband infrastructure) and compulsory employee / state ownership of 10% of shares for bsuensses with 250 or more employees. These policies could be watered down or blocked by MPs unless Labour has a big majority, but rail nationalisation is a popular policy amongst voters and could secure cross party support. Investment in tackling climate change is likely to reinforce models of public sector and co-operative delivery.
- Taxing wealth: increased tax on assets (increasing CGT rates; reviewing Entrepreneurs Relief), on financial transactions, and on higher incomes.
- Higher wages, immigration restrictions for lower skill jobs – and new worker’s rights: Labour would also move to a £10 minimum wage, including younger workers. They may introduce some measures to require employers to find British workers before hiring migrant workers. New employment law could include collective bargaining and union recognition in any firm of more than 250 employees, a four-day week, banning zero contract hours and further action on equal pay.
These amount to a radical programme of change in the economy and have significant implications for: any businesses employing 250 people, utilities, outsourcing service providers, public sector suppliers, financial services, private equity, and real estate.
Here is a summary of some of the dividing lines between the Conservatives and Labour, as well as some common ground for government action whoever wins the election:
3. The Liberal Democrats hold the balance of power:
The Liberal Democrats have made clear that they will not support a government that pursues Brexit and that they would not put Jeremy Corbyn into power. As things stand this rules out an agreement with either of the main parties. This could see a deadlock and the need for a second election. Some red lines are emerging for Liberal Democrats to give any kind of support to another party:
- Seeking to stop Brexit: The Liberal Democrats would insist on a 2nd referendum, with a clear ‘remain’ option and possibly votes for 16 years olds and EU citizens settled in the UK.
- Fiscal prudence: The Liberal Democrats see themselves as the last guardians of fiscal prudence so might slim down spending pledges and support a corporation tax rate of 20% and abolition of many corporate tax reliefs.
- ‘Responsible business’: Liberal Democrat leaders have made clear they support market economy so would oppose Labour’s focus on state ownership. But they would seek to regulate markets, to strengthen competition and increase the focus on longer term ‘stakeholder interests’ away from shorter term shareholder interests.
What can business do now to be ready for all eventualities?
1. Strategic planning: I am increasingly running election strategy sessions with management teams. Scenario planning can identify specific risks and opportunities to your business in the event of different election outcomes and identify what actions you might take to protect and create value in your business. Being aware of the top risks and opportunities means you will be able to act faster once the election result is known. Identifying common ground across the parties can also enable you to act now with more confidence.
2. Get Ready for Brexit: with the Brexit deadline of 31 January, you should continue to get ready for Brexit in your business and in your supply chain. I have analysed in more detail the Brexit implications of the election here: www.grantthornton.co.uk/insights/election-2019-what-does-this-mean-for-brexit.
3. Building resilience in the face of uncertainty: the election and its aftermath will continue a climate of uncertainty in the UK economy. Businesses are increasingly taking proactive steps to navigate this:
- Improve your cash management
- Reduce costs
- Maintain dialogue with investors and funders
- Take action to attract talent
- Explore new markets
As always, focusing on business basics provides the foundation for building resilience in the face of political and makret uncertainty.
For more insights, you can download a recording of a Brexit and election webinar I hosted last week: Grant Thornton Brexit and election webinar
Scenario planning can identify specific risks and opportunities to your business in the event of different election outcomes and identify what actions you might take to protect and create value in your business. Being aware of the top risks and opportunities means you will be able to act faster once the election result is known.