When the polls opened at 7am on Thursday 7th May, the pundits and the pollsters were as one: the only certainty was a hung parliament. It was the most difficult-to-predict election for generations. The opinion polls had the parties running neck and neck, but the Conservatives led slightly in the predicted number of seats.
A rough average from the pollsters seemed to be around 290 for the Blue team, 267 for the Reds and with the Lib Dems sinking to 25 or 26. Meanwhile, UKIP looked to be struggling to achieve its leader’s predicted “handful” and north of the Border, the SNP tsunami was gathering force.
Around the country, tea, biscuits and possibly something stronger were on hand as viewers and supporters prepared themselves for a long night – with the exit polls almost certain to proclaim ‘no overall majority.’ Some commentators were predicting that Britain could be without a government for a month, as deals were done in darkened rooms and party spokesmen queued up to claim that they – and only they – were the legitimate party of government.
So much for the predictions.
David Dimbleby waited for Big Ben to strike ten, and then announced his exit poll bombshell. The Conservatives would win 316 seats, Labour 239, the SNP would take all but one seat in Scotland and the Liberal Democrats – paying the ultimate price for five years of coalition – would be reduced to a rump of ten.
“If that poll is accurate,” declared Paddy Ashdown, “I’ll eat my hat.” By 8am on Friday morning, ‘Paddy Ashdown’s hat’ had its own Twitter account and 12,000 followers, as the BBC exit poll proved remarkably accurate. Around the country, ‘big beasts’ including Vince Cable, Danny Alexander and Ed Balls were metaphorically slain and suddenly found themselves wondering how to write a CV.
The final result was a workable majority for David Cameron, with the Conservatives on 331, Labour with 232 seats and the SNP as the third force in British politics, capturing 56 of Scotland’s 59 seats.
Open-necked and suddenly looking remarkably relaxed, David Cameron returned in triumph to Conservative Central Office. He then went to visit the Queen (having remembered to put a tie on) and returned to 10 Downing Street to begin work on his new Cabinet. He immediately confirmed George Osborne’s continued tenure as his next door neighbour, with a ‘promotion’ to First Secretary of State.
Sunday’s papers were full of what will happen in the new Government’s ‘first 100 days.’
The Sunday Express proclaimed ‘tax cuts for all.’ The Sunday Times foresaw a ‘blitz on Europe’ and a ‘British Bill of Rights’ to replace the Human Rights Act.
There was also a cartoon showing the Prime Minister on a leash, with the leash held by a ghostly backbencher. A majority of 12 must have been beyond David Cameron’s wildest dreams: suddenly there was no need to worry about constitutional precedents, ‘confidence and supply’ motions or putting together a coalition. But at some stage in parliament he will have trouble from his own party. John Major tried to govern with a similarly small majority: he was gradually beset by internal party feuding as every backbencher seemed to pursue his own local campaign and associated demands for money. David Cameron will need to choose his team of whips with care.
There are, though, two more pressing problems. Europe – and the commitment to hold an in/out referendum by 2017 – and Scotland. Let’s look at them in more detail.
Speaking after his victory had been confirmed, former SNP leader, Alex Salmond, declared that, “the Scottish lion has roared and its voice will be impossible to ignore.” Nicola Sturgeon repeated her vow that the SNP would continue to oppose austerity: as one commentator put it, “she seems to believe that austerity has been imposed as a form of punishment: not as an economic necessity.”
On the BBC, Andrew Marr spoke of an “economic car crash” and it seems hard to work out how the new Government will reconcile the demands of the SNP. Boris Johnson – newly elected in Uxbridge – suggested a federal arrangement, but it is difficult to see Scottish MPs having the credit card and English voters agreeing to pay the bill each month.
If anything, Nicola Sturgeon appeared to have hardened her stance by Sunday, declaring that the SNP was the only effective opposition party, and pushing her demands for fiscal autonomy. Speaking on the BBC, she said, “We want priority devolution over business taxes, employment, the minimum wage [and] welfare … David Cameron does not give me any indication that he wants to go beyond the current proposals.”
The negotiations on this one are going to be long, difficult and very tetchy. There will, for example, be counter pressure to re-negotiate the Barnett Formula so that Scotland doesn’t get a higher per-capita share of public spending – and that’s before Scottish MPs start voting on English issues…
Conservatives may be secretly hoping there is another referendum and that Scotland does vote for independence – but with the SNP only capturing 50% of the popular vote, a ‘yes’ is very far from certain.
David Cameron campaigned on a commitment to deliver a referendum on the UK’s continuing membership of the European Union by 2017 – once he has re-negotiated the terms of our membership. Nigel Farage consistently claimed the most important measure – free movement of labour and hence unchecked immigration to the UK – was non-negotiable, but Cameron seems confident that he can come back from Brussels with concessions. There seems certain to be a huge weight of money behind the ‘Stay In’ campaign as and when the referendum takes place: against that, the Lib Dems – Europe’s main cheerleaders – have just suffered a catastrophic result.
Europe is clearly worried by the prospect of the UK renegotiating its position: ‘Le Monde’ headlined its article, ‘Cameron’s triumph: Europe’s concern.’ Despite rumours that discussions have already taken place with Angela Merkel, Germany’s press was less complimentary – suggesting that German public opinion was losing patience with the UK’s demands for ‘Extrawurst.’ (That’s an expression derived from the traditional German sausage: it means ‘to get special treatment.’)
Europe will not want to lose the UK’s buoyant economy – especially as the unemployment problems in France continue to increase – but there will be limits to how far they will go in re-negotiations. David Cameron may not be able to tell the story he wants to tell – or that his backbenchers want to hear.
Legislation and the Economy
So what can we expect from the new Government? Asked this by a reporter, David Cameron simply smiled and said, “Read the manifesto.” Perhaps not… We appreciate that after six weeks of wall to wall election coverage, sitting down to read a party manifesto may not be top of your priorities, so we’ve summarised the main points for you. This is what we can reasonably expect to see from the Conservative administration:
Cuts? Or more jobs?
A recurring theme running through the election campaign was the need for the Government to make £30bn of cuts, including £12bn in so far unspecified welfare cuts. The Office for Budget Responsibility has described this as potentially a “rollercoaster ride” with big cuts in 2016/17 and 2017/18 before – presumably – a pre-election increase in spending in the following years (under the Fixed Term Parliament Act the next General Election will be on May 7th 2020).
It looks certain that the annual benefits cap will be reduced by £3,000 to £23,000 and that housing benefit will be removed from those under 21 on Jobseeker’s Allowance. Outside of that, we suspect that the Government will seek to reduce welfare spending by creating more jobs. 2m jobs have been created since 2010: it is Cameron’s aim to create 2m more in the next parliament, so we can expect to see plenty of measures to promote enterprise as he moves towards his dream of a low tax/high enterprise society.
So expect to see a bill ‘for jobs and apprenticeships’, possibly looking to create up to 3m more apprenticeships, paid for by the reduction in the benefits cap.
There will also be specific measures to promote enterprise. Figures suggest that over the last five years there have been 760,000 business start-ups and Cameron has stated his desire to make Britain, “the best place in Europe to do business by 2020.” So we can certainly expect promises of further reductions in red tape, backed by increases in start-up loans for small businesses. We’re also likely to see an extension of the ‘Help to Grow’ scheme, designed to allow fast growing companies to access capital and reach their potential.
All this sounds very fine – but it is perhaps sensible to inject a note of caution. As George Osborne has said many times, the UK cannot be immune to what is happening in the rest of the world, whether it’s the slowdown in Europe or concerns about China’s faltering growth rate. As Mr Cameron seeks to re-negotiate the terms of Britain’s relationship with the EU, he must be praying that the massive programme of quantitative easing recently introduced by the ECB is successful, and that the rest of Europe enjoys some of Germany’s success. The best laid plans of mice, men and Prime Ministers could be blown a long way off course by a protracted slowdown in Europe.
David Cameron promised to walk into Downing Street on May 8th and start work, with his first commitment being to draw up a law ensuring that, “no one working 30 hours on the minimum wage pays any income tax at all.” The Prime Minister wants to guarantee that the lowest paid are kept ‘permanently out of tax’ which would suggest that we’re going to see regular annual increases in the Personal Tax Allowance, to keep pace with rises in the minimum wage.
Elsewhere, tax will be more a case of what’s not going to happen: the Mansion Tax can now be consigned to history and bankers and ‘non-doms’ will certainly have spent a more relaxed weekend.
Neither will we see increases in Corporation Tax. Had the Conservatives been reliant on Northern Ireland’s DUP for support, one of their demands would almost certainly have been a devolution of corporation tax powers to allow Northern Ireland to compete with the rock bottom rates offered by Dublin: don’t be surprised if this still happens despite the Conservative majority.
Finally, we’re also likely to see an increase in Inheritance Tax thresholds. David Cameron has frequently spoken of his desire to take family homes worth up to £1m out of the inheritance tax net. He now has five years to make it happen.
Education and Housing
Cameron has committed himself to a bill to ‘deliver better schools.’ We suspect the focus will be on more young people leaving school with the skills employers are looking for – which can’t be a bad thing. There will also be an extension of free childcare for working parents of three and four year olds: this will probably be doubled to 30 hours per week.
On housing, we’ll certainly see the Government bring forward proposals to extend the Right to Buy to 1.3m housing association tenants. This move has attracted widespread criticism but for David Cameron it’s an ideological measure about “giving thousands of families the security of their own four walls.”
It’s fair to say that there is an ideological theme running through much of what David Cameron wants to do. He’s spoken of wanting to “re-write not just the laws of the country but the values of this country.” Clearly his vision is of an enterprise-led, hard-working, modern country. That’s ultimately how he believes he’ll reduce the welfare bill and pay for better public services.
That last comment inevitably brings us back to the elephant in the room – if that’s not an ungallant way to describe Nicola Sturgeon. In London, we have a newly elected Government committed to low taxation, lower welfare spending and ‘rolling back’ the State. Across the floor of the Commons, it will face 56 Scottish Nationalist MPs fiercely determined on the exact opposite.
The Conservative Manifesto includes a commitment to introduce a Scotland Bill to “honour in full our commitments to Scotland to devolve extensive new powers.” If Nicola Sturgeon has her way these powers will include giving Scotland the powers to set its own income tax. Does this mean we’ll see higher rate taxes rise in Scotland – possibly leading to the country having its own ‘non-doms’ as high earners in Scotland opt to live in England? The 07:18 from Berwick to Edinburgh Waverley could suddenly become remarkably busy.
Nicola Sturgeon has rung David Cameron to congratulate him on his success: he in turn has congratulated her. We suspect the conversation was terse. The two could hardly be further apart and the Scotland Bill – and the corresponding ‘English votes for English laws’ legislation – is going to test the Union to breaking point. As we suggested above, if the SNP continually runs a budget deficit to pay for higher welfare spending, English voters will not pick up the bill indefinitely.
There will be many on both sides of the Border who agree with former Labour MP Tam Dalyell’s view that devolution was ultimately, “a motorway to independence with no exits and no U-turns.”
But in the short term, David Cameron can enjoy his majority and his new-found popularity among his more hard-line backbenchers. Undoubtedly, some of them will rebel at some point, but the Prime Minister’s majority appears to be strong enough to allow him to govern for the full five year term.
We can also enjoy the fact that the currency markets and the stock market have got what they wanted most: certainty. Not surprisingly, both the stock market and sterling strengthened on Friday.
There will undoubtedly be challenges ahead – and “events, dear boy, events” will test David Cameron as much as they once tested Harold Macmillan. As always, we will keep you updated on these ‘events’ and on the implications they have for your financial planning. Please don’t hesitate to contact us if you have any questions on this report: for now though, we recommend that you enjoy the summer – safe in the knowledge that you will not have to watch another ‘Leaders’ Debate’ until 2020…
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