UK Election Special – When Two Tribes Go To War

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British voters will on Thursday 8th June vote on the composition of the 650-seat House of Commons – the third major popular vote in two years – after Prime Minister Theresa May’s decision back in April to trigger early general elections.

Theresa May’s motivations were arguably four-fold: (1) Win a popular rather than party mandate, (2) Capitalise on the massive lead in the polls the ruling Conservatives enjoyed over the opposition Labour Party and thus allow her to push through her own agenda, including a possibly softer form of Brexit, (3) Allow the government more time to secure a new EU trade deal, and (4) Strengthen the government’s stance in negotiations with the EU.

Objectives (1) and (3) will likely be met but objectives (2) and (4) may prove more elusive.

Opinion polls point to a trend-fall in popular support for the Conservatives to around 44% and sharp rise for Labour to 35%, with the gap between the two main parties halving to about 9pp from 20pp six weeks ago. Aggregate support for the Liberal Democrats, UKIP, SNP and Green Party is flat-lining around 18%.

However, there is still great discrepancy amongst polling agencies which in the past have misestimated true voting intentions. Moreover the UK’s first-past-the-post electoral system makes it difficult to translate share of votes into seat numbers. Whether the Conservatives significantly improve on their current 330 seats or fail to secure a parliamentary majority, as You Gov currently predicts, is a tough call.

Nevertheless, a number of important themes have emerged in recent months.

First, the slingshot campaign has exposed the frailty and flaws of the Conservative machine, including of its leader and manifesto, and reinforced my view, first set out in December, that the government is ill-equipped, ill-prepared and lacking in institutional capacity to negotiate complex deals with the EU and non-EU partners.

Second, it is a two-horse race between the ruling Conservatives and Labour, with the other parties on course to secure only a modest number of seats – a break with recent elections.

Finally, the political centre of gravity has shifted to the left, with in particular tax rates likely to rise regardless of which party wins next week’s election.

My core scenario is a hollow victory for the Conservatives: 360-370 seats with a low voter turnout. This would reduce the risk of opposition parties and rebel Conservative MPs torpedoing government legislation but would fall short of the landslide victory which Conservatives thought possible back in April.

Finally, a modest (or even significant) increase in the Conservatives’ parliamentary majority is unlikely to materially improve the government’s hand when negotiating with the EU.

 

British voters return to polling stations…yet again

In one week’s time British voters will, on Thursday 8th June, once again return to polling stations to vote on the composition of the 650-seat House of Commons (lower house of parliament). This will be the third major popular vote in two years, with the UK referendum on EU membership held less than a year ago and general elections, normally convened every five years, last held on 7th May 2015 (see Figure 1).

olivier desbarres 2 tribes fig 1

 

Backdrop to elections key in understanding their importance and potential impact

The leader of the ruling Conservative Party and Prime Minister, Theresa May, announced on 18th April that she would be bringing forwarded by three years general elections originally scheduled for May 2020 – despite having previously ruled out early elections. Understanding her change of heart and true motivations – beyond the somewhat clichéd and robotic explanations she has publicly provided – is key to ascertaining the election’s possible impact on the British political landscape, the economy, financial markets and Brexit negotiations. For all intents and purposes, I would argue that Theresa May’s motivations were four-fold.

 

1. Grant Theresa May a popular rather than party mandate

Theresa May was elected party leader and de facto Prime Minister in a Conservative Party election in July 2016 and inherited former Prime Minister David Cameron’s policy platform. Securing a majority at next week’s election would at the very least give her a popular mandate and somewhat greater credibility.

 

2. Capitalise on massive lead in the polls over Labour Party and push through her own agenda

The former Home Secretary clearly wanted to secure a far larger parliamentary majority by capitalising on the significant 20 percentage point (pp) or so lead in opinion polls which the Conservatives enjoyed over the opposition Labour Party lead by Jeremy Corbyn (see Figure 5). Estimates in April had the Conservatives significantly increasing their seats in the House of Commons from 330 (see blue column in Figure 2) to as many as 450, which would have increased the size of their absolute majority to 124 seats from just four.

 

olivier desbarres 2 tribes fig 2

 

With an overwhelming majority, the Conservatives could more easily push policies through parliament even if some Conservatives MPs rebel and side with the opposition or if the House of Lords (upper house of parliament) tries to oppose them. Specifically, if Theresa May can secure about 360 seats or more, she would have greater (but probably not unlimited) room to negotiate a softer Brexit even if the 30 or 40 eurosceptic Conservatives MPs vote against such an agreement. In an extreme scenario, Theresa May could arguably have the mandate to walk away from a deal with the European Union (EU) rather than feeling compelled to signing a “bad” deal. The bottom line is that a huge majority would give Theresa May carte blanche to conduct policy on her own terms.

Note that the House of Commons refers to the “government majority” rather than the “absolute majority” as it better reflects the ability of the ruling party (or coalition) to command voting majorities and thus to govern. The Conservatives currently enjoy a working of majority of 17 seats, calculated as Conservative Members of Parliament (MPs) less all other parties but excluding MPs who typically don’t vote in parliament[1]. A win of 450 seats would give the Conservatives an overwhelming government majority of 257 seats – by any measure a crushing, landslide victory.

To put this in perspective, in the past 45 years and 12 general elections, the winning party (or coalition) has on average won a 77-seat government majority, with Tony Blair’s Labour Party winning a record-high majority of 179 seats in his first election in 1997 (see Figure 3).

 

 

3. Allow the government and ruling Conservatives more time to secure a new trade deal with the EU

The triggering of early elections has arguably bought Theresa May and the Conservative government more time to conclude a new deal with the EU. The UK’s membership to the EU will formerly cease in March 2019 (two years after Article 50 was triggered), whether the UK and EU have agreed on the terms and conditions of the UK’s exit from the EU and of the UK’s deal with the EU (see Figure 4).

 

 

olivier desbarres 2 tribes fig 4

 

Negotiations are due to formerly start on 19th June, according to the European Council but may only start in earnest after the German general elections on 24th September. In any case they will likely have to conclude by end-2018 to allow the British Parliament and European Council time to vote on any agreement – a negotiating timeframe of at best 18 months. This could be sufficient time for an agreement on the terms and conditions of the UK’s exit from the EU to be reached. However, by the government’s own admission, a deal on the new terms and conditions of the UK’s relationship with the EU is unlikely to be concluded within this timeframe, with a transition agreement the more likely outcome.

Under the original electoral timetable, the Conservative government would have had a further 14 months to somehow finalise its new relationship with the EU before general elections in May 2020. This window would likely have been too short given complex negotiations with no precedent involving economic, financial, social, political and legal matters. Moreover, a recent Financial Times study concluded that the UK, beyond its negotiations with the EU, would have to revisit around 750 agreements with 168 non-EU countries, covering trade, customs, regulatory cooperation, transport, nuclear, agriculture and fisheries.

Therefore, the risk for Theresa May was that she would have been fighting a general election with at best only a transition-deal with the EU secured and at worst no deal in place, which could in turn have hurt the Conservative Party’s re-election chances. By pushing back the next general elections to May 2022, Theresa May has in effect bought the Conservative Party another two years (assuming of course it wins next Thursday’s election).

 

4. Strengthen the British government’s stance in negotiations with the EU

The fourth and arguably by far the most contentious reason why Theresa May called early elections is to strengthen the government’s ability to negotiate a favourable trade deal with the EU. The theory is that if domestically the Conservatives gain a far stronger hand and the government is unencumbered by political opposition, Theresa May will have greater room for manoeuvre and credibility when trying to push through an aggressive (read advantageous) deal with her EU counterparts.

 

Gap between intentions and reality likely significant

The question is whether these four underlying albeit undisclosed motivations translate into reality. While the objectives of lengthening the government’s timeframe to secure a new deal with the EU and giving Theresa May a popular mandate will likely be met, the twin goals of winning a landslide majority and converting that into greater Brexit bargaining power may prove far more elusive.

The most pressing question and arguably greatest source of uncertainty – despite the elections being only seven days away – is how many seats the ruling Conservative party will win next week. Political commentators remain very divided as to whether Conservatives will secure a record-high number of seats, increase their seats by a significant or modest number, lose some of their 330 seats, fail to win an absolute majority (326) or even worse still fail to win a government majority (322).

 

Opinion polls show trend slide in support for Conservatives but numbers still volatile

Opinion polls which ask respondents which party they will vote for are helpful in providing an overall picture of how the main parties may be faring but are beset by at least three potential drawbacks.

They have in the past six weeks showed a trend-fall in popular support for the Conservatives to around 44% and sharp rise in Labour backing to 35%, with the gap between the two parties halving to about 9pp from 20pp six weeks ago (see Figure 5). Support for the other main parties has flat-lined at low levels, with the Liberal Democrats on 9-10%, the United Kingdom Independence Party (UKIP) on 4.5%, the Scottish National Party (SNP) on 4% and the Green party on 2%.

 

 

However, there is still great discrepancy amongst polling agencies as Figure 6 shows. For example, polls conducted between 26th and 31st May had the gap between the Conservatives and Labour as narrow as 3pp (You Gov poll on 31st May) and as wide as 14pp (ICM poll on 26th May). A gap-difference of 11pp could conceivably lead to a very different distribution of seats (see below).

 

 

This is in contrast, for example, to French opinion polls which in the weeks before the first round of the presidential elections on 23rd April showed broadly stable levels of support for the three main candidates and few discrepancies between the main polling agencies (see 2017 French elections – They think it’s all over…it isn’t, 11 May 2017).

 

Question marks over the reliability of UK opinion polls and under/over estimations bias

Moreover, one has to be cautious in assuming that these polls reflect the electorate’s true voting intentions and even that polling samples are representatives of the 45.766 million voters registered in the UK (according to ONS data). That is not to say that all opinion polls are necessarily useless. Polls under-estimated support for Donald Trump in the US presidential elections and for Brexit in last year’s UK referendum but in both cases the actual margins of victory were modest (and within the range of statistical errors associated with such polls). French opinion polls very accurately captured the outcome of the first round of the presidential elections and to a lesser extent the second and final round on 7th May and historically have enjoyed a strong forecasting track record.

Previous British general elections suggest that the Conservatives, Labour and Liberal Democrats tend to outperform when polls indicate a loss of seats on the previous election (see UK general elections: a riddle, wrapped in a mystery, inside an enigma, 13 March 2015). In the 2015 election, the ruling Conservative Party won 329 seats, a far greater number than the 280 or so seats that polls had “forecast” and a 27-seat increase on the number of seats the Conservatives previously held (see Conservatives win landslide victory in UK elections, 8 May 2015).

Conversely, previous elections suggest that the Conservatives, Labour and Liberal Democrats tend to underperform when polls indicate gains on previous elections. Indeed Labour won only 232 seats in 2015, about 38 seats short of pre-election forecasts and a 24-seat loss. Similarly, the Liberal Democrats won only 8 seats, a third of the number forecast based on pre-election polls and a massive 48 seat negative swing, and while they averaged 27% in the polls before the 2010 election they only received 23% of the vote.

If the above pattern holds true in next week’s election, Labour could outperform polls’ “predictions” while the Conservatives underperform. But again nailing down what percentages of the votes polls ascribe to the main parties is proving trickier than nailing jelly to a wall.

 

First-past-the-post electoral system makes it difficult to translate share of votes into seats numbers

Finally, it is difficult to accurately translate the share of votes which a party will win into the number of seats it will gain in the House of Commons because the UK runs a first-past-the-post electoral system. Under this one-round winner takes it all format, the candidate who wins the most votes in a constituency becomes MP, regardless of the number of votes he/she wins (and voter turnout). As a result, a party can win a large percentage of the national vote but only win a small number of seats and vice-versa (see Figure 7).

 

 

In the 2015 elections UKIP won the third largest share of the national vote (12.6%) but only one parliamentary seats (0.2% of the 650 seats). Similarly, the Liberal Democrats won 8% but only 1.2% of the seats. Conversely, the SNP won less than 5% of the national vote but because it targeted only Scottish constituencies it managed to become the third largest party in parliament with 56 seats. So even if polls consistently and accurately measured voters’ real intentions at a national level, there would still be room for error when predicting seat numbers.

So far only one polling agency, You Gov, has attempted to forecast the election result across all 650 constituencies, using national polls and analysis of key demographics, past voting behaviour and voter turnout to scale up the numbers. Poll results updated on 1st June shows the Conservatives winning only 317 seats, a 14-seat loss and nine seats short of both a government and absolute majority while Labour would increase its seat numbers from 229 to 253 (see Figure 8). This would result in a hung parliament, with the Conservatives and Labour having to cobble a coalition with one or more other parties in order to secure a working majority and form a government.

You Gov estimates that the main other parties would see only negligible swings in their seat numbers. However, it acknowledges that its forecast margin-of-error is sizeable, with the Conservatives winning anything from 285 to 353 seats.

 

 

Election outcome still tough to call but key themes still stand out

Forecasting the number of seats the main parties will win therefore remains fraught with difficulty. Nevertheless, a number of important themes have emerged in recent months:

  • The very short election campaign has exposed the frailty and flaws of the Conservative Party machine, including of its leader and manifesto.
  • It is very much a two-horse race between the ruling Conservatives and opposition Labour, with the other main parties on course to secure only a modest number of seats and;
  • The political centre of gravity has shifted to the left.

 

A far from distinguished performance by Theresa May and the Conservative political machine

The halving of the gap between Conservatives and Labour in opinion polls has as much to do, if not more, with the Conservative Party’s lacklustre showing in the past six week as it has with Jeremy Corbyn’s more assured performance, in my view. The very short election campaign period of two months contrasts with previous British elections in which parties and their candidates have enjoyed far more time to prepare their political battle plans (similarly, the candidates for the French presidential elections in May had over six months to set out their stalls and fine-tune their message).

This slingshot campaign, which has been long on hot air, empty promises, personal attacks, half-truths, tired clichés, fuddled numbers and half-baked policies, has exposed the internal contradictions and confusing message of the Conservative manifesto. The government has perhaps unsurprisingly been forced into a number of embarrassing u-turns including on the so-called “dementia” tax. Recall that the government had already u-turned back in March on its initial decision to cut the tax-free dividends allowance.

The election campaign has also flagged Theresa May’s tendency to gloss over obvious mistakes, her propensity to run an almost presidential rather than party campaign and her often wooden and detached delivery of the party’s key messages (she decided not take part in the televised party-leader debate on 31 May, with Home Secretary Amber Rudd deputising instead).

If anything, the past two months have reinforced my view, first set out in The A-team had a plan, the British government has a nebulous goal (13 December 2015) that the government is ill-equipped, ill-prepared and lacking in institutional capacity to negotiate complex deals with the EU and non-EU partners.

 

A two-horse race between the Conservatives and Labour in break with recent past

The Liberal Democrats, UKIP, the SNP and Green party are in an aggregate polling around 18% (see Figure 5), which according to You Gov will translate into only 57 seats or 8.8% of the 650 seats on offer (see Figure 8). The Liberal Democrats have run a very quiet, almost unnoticeable election campaign under the uninspired leadership of Tim Farron. UKIP, which has been in disarray since the Brexit vote and Nigel Farage’s departure, may lose its only seat in parliament and is at risk of becoming a political footnote of history. The SNP is seemingly on course to lose some of its 54 seats while its case for a second referendum on Scottish independence seems to have lost traction.

This contrasts with the past two elections in which at least one other party has played an important role:

  • In the 2015 elections, UKIP won only one parliamentary seat but 12.6% of the national vote and importantly drove much of the debate on the UK’s membership to the EU and immigration. The SNP became the third largest party with 56 seats, which emboldened it to push for a second Scottish independence referendum.
  • In the 2010 elections, the Liberal Democrats won 56 seats and became a junior coalition partner with a Conservative Party well short of a parliamentary majority.

 

In aggregate Conservatives and Labour are unlikely to win the number of seats they won in the 1997 and 2001 elections let alone in the 1979 to 1992 elections, but their share of the seats could conceivably rise for the third consecutive year after hitting a record-low of 85.1% in 2005 (see Figure 9). The bottom line is that while the British political landscape and House of Commons remains somewhat granular, the combined influence of the Conservatives and Labour is very significant and seemingly rising.

 

 

The political centre of gravity has shifted to the left

The old adage that Labour is the party of high taxes and Conservatives the party of low taxes no longer really holds sway and it would be more accurate to describe Labour as the party of very high taxes and the Conservatives as the party of lower taxes. With the Liberal Democrats sticking to a left-wing agenda, I would argue that the political centre of gravity in the UK is the furthest to the left in over a decade.

Labour under Jeremy Corbyn, elected party leader in September 2015, has shifted to the left and the traditional ground occupied by former Labour leader and Prime Minister Gordon Brown in 2007-2010 and shied away from the centrist New Labour policies which saw Tony Blair elected in three consecutive elections. Most notably Corbyn has committed, if elected, to increase the marginal income tax rate for those earning more than £80,000 per annum to 45% and to 50% for those earning more than £123,000 p.a., introduce an “excessive pay levy” charging employers for any individual earning over £330,000, increase the corporate tax rate from 19% to 26% and reduce inheritance tax thresholds.

At the same time, the Conservative Party has in my view adopted a more centrist stance. While it has committed to increasing the personal income tax allowance to £12,500 and the threshold for the higher rate tax band to £50,000, it hiked national insurance rates in the March budget. Importantly, it has scrapped the Conservative pledge made in 2015 of not raising VAT, income tax and national insurance rates (the so-called “tax lock”). The Conservatives have promised to cut the corporate tax rate to 17% from 19% but not set out a timetable to review high business rates. The possibility that taxes will go up (and are very unlikely to be cut) is very “un-Conservative”.

The Conservatives’ shift is in part ideological and aimed at dispelling its image as the “nasty party”. However, modest economic growth, the rising cost of public services (including the National Health Service) and potential fiscal short-fall as a result of Brexit are also seemingly curbing the government’s room for manoeuvre. The result is almost a mirror image of the 1990s when Tony Blair repositioned, with much success, the Labour Party from the far-left to the centre of the political spectrum.

 

My core scenario: A somewhat hollow victory for the Conservatives

My core scenario, based on my own model and analysis, is that the Conservatives will gain around 360-370 seats – a 30-40 seat increase which would translate into an absolute majority of 34-44 and a government majority of 77-97. This would be in line with the historical average for government majorities recorded in the past 45 years and the majorities won by the Conservatives in 2010 and Labour in 2005 (see Figure 3).

A margin of victory of this order would reduce the risk of opposition parties and rebel back-bench Conservative MPs torpedoing government legislation and derailing the government’s Brexit plans – whatever they may be. Such an outcome would, in my opinion, represent a decent achievement comparable to winning bronze in a 100-meter race – an honourable result but one unlikely to stick in peoples’ memories.

Low voter turnout would further undermine a Conservative Party win

But it would fall well short of the crushing landslide victory which Conservatives thought possible back in April. Moreover, there are reports that voter turnout, defined as the share of valid votes as a percentage of registered voters, could hit an all-time low due to the paucity of the candidates and their campaigns and to voter apathy (three major votes in less than two years, not to mention the 2014 Scottish referendum and recent local elections).

The current record was set in the 2001 elections when Tony Blair’s Labour Party won a second term on a voter turnout of only 59.4% (see Figure 10). If the Conservatives win 44% of the national vote (as polls currently suggest, with all the usual caveats) but turnout falls to say 59%, the Conservatives would only have a quarter of the electorate behind them – hardly the sweeping mandate which Theresa May seeks.

A modest seat increase allied to a low voter turnout would in my view cast a shadow on the Conservatives’ election campaign as well as Theresa May’s leadership skills. Moreover, while such an outcome would keep the Conservative party in the driving seat its scope to cut taxes and introduce market-friendly policies would remain limited (see above).

 

 

Seat increase unlikely to have tangible effect on government’s ability to play strong hand with EU

Finally, it is not obvious that a modest increase in the Conservative’s parliamentary majority would materially improve the government’s hand when negotiating with the EU – a point which EU leaders have explicitly made. When all is said and done, the European Council and European Parliaments – which will negotiate on behalf of the remaining 26 EU member states – will decide on the merits of a new deal with the EU irrespective of whether the Conservatives have a 10, 50 or 100-seat government majority.

What is likely more relevant to the outcome of multi-year negotiations, in my view, is the government’s ability to put forward a cohesive, comprehensive and timely draft proposal highlighting the UK’s strongest assets, including the provision of financial services. By this metric, Theresa May and her inner circle have so far shown little evidence that they can go head to head with the EU’s considerable political machine and extract a deal which, in aggregate, is more favourable than the one the UK currently enjoys. Theresa May has stuck to her mantra of “obtaining the best possible deal” but provided few details about what this would entail while her argument that “no deal is better than a bad deal” is sounding increasingly hollow.

 

Olivier Desbarres

Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.

 


[1] These are the Speaker of the House (who resigns from his/her party, at present the Conservative Party), the three Deputy Speakers (currently two Labour, one Conservative) who don’t resign from their parties and the four Sinn Fein MPs who do not sit in Parliament as they do not recognise its legitimacy. 330 minus 313 (320 minus 3 minus 4) equates to 17-seat government majority.

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