Are the Tories finished and should investors even care?

Bad blood

This was supposed to be the year when the UK put the coronavirus pandemic behind it and flew into clear, post-Brexit skies. It didn’t turn out like that. An inflationary ripple became a tsunami; Europe was plunged into geopolitical crisis with a vicious war at the heart of the continent; interest rates lurched upwards; the cost-of-living crisis intensified, provoking a wave of strikes in the public sector; and two consecutive quarters of mildly negative growth heralded recession. The national finances have deteriorated further: the UK is expected to borrow £177bn this financial year.

Against this backdrop the Conservative party, once termed the UK’s “natural party of government”, had a nervous breakdown and decapitated not one but two leaders in quick succession. The prime minister who had secured the Tories an 80-seat majority less than three years ago was given the boot. This week, the third prime minister of 2022, Rishi Sunak, is said to be facing a mounting threat of rebellion by sections of his disgruntled backbenchers, on issues such as planning and onshore wind farms. If this plot had been advanced in one of Michael Dobbs’ or Jeffrey Archer’s political novels it would have been dismissed as ludicrously improbable.

Last weekend, some polling was released by Lord Ashcroft, a former donor to the Tory party who has had (let us say) a colourful business career. He also writes books about the internal machinations of British politics. It may be that his polling activity has an ulterior motive − to influence party policy – but the methodology of his polling is considered robust in Whitehall. When Lord Ashcroft releases his numbers, political ‘anoraks’ from across the spectrum sit up.

Lordashcroftpolls.com consulted 5,210 adults, with the sample weighted to reflect the broad make-up of the British population, between 8 October and 4 November. The poll showed that on 12 key issues – including Brexit, the NHS, the cost-of-living crisis, immigration and so on – Sir Keir Starmer is rated above Sunak (although not on security and defence). While Starmer and Sunak score similarly in terms of their personal rankings, the poll suggests that the Tories’ reputation for financial competence has been wrecked by the Truss-Kwarteng ‘kamikaze’ mini Budget and its aftermath. Only seven percent of respondents described the party as “competent and capable”. The Tory brand is in tatters – for now at least.

A slew of recent polls on voting intentions has put Labour around 20 points ahead of the Conservatives. That points to electoral wipeout for the Tories next time round. Sunak’s accession has not yet impacted the polls. It is hardly surprising then that around 10 Tory MPs have indicated in the last week or so that they will not stand for re-election. These include rising stars such as 29-year-old Dehenna Davison, MP for the ‘red wall’ seat of Bishop Auckland, Chloe Smith and William Wragg. Even Tory MPs with five-figure majorities feel insecure.

Sunak was of course the person who warned that Liz Truss’s economic policy of making unfunded tax cuts at time of inflation might unravel – and it did. But he has taken over a bitterly divided and unhappy party. Many of his backbenchers blame him for Boris Johnson’s demise. Elected only seven years ago in 2015, he has few staunch allies. Most Tories regard Sunak as a competent technocrat, though there are mutterings that he is more of a ‘head boy’ than a national leader. And his missteps while chancellor during the coronavirus pandemic have not been forgotten – especially the coronavirus loan schemes which may have lost over £6bn to fraudsters.

His 38-day old government has not articulated a coherent mission statement. Sunak is a pragmatist – but what exactly does he believe in? The current menu of austerity and high taxes, with marginal tax rates back to pre-1979 levels is deeply unappetising − not least in the Tory heartlands.

Moreover, the cabinet that Sunak has assembled is a cocktail of Tory competing factions. But the deeply anti-EU European Reform Group is still predominant, despite the departure of Jacob Rees-Mogg. Any attempt to draw closer to Europe will reignite ‘blue-on-blue’ hostilities.

Even a strong economic recovery in late 2023/ early 2024 – which is not guaranteed − may not save a governing party which is perceived as exhausted (it will have been in power for 14 and a half years by then) and ill-disciplined. After the debacle of Black Wednesday (16 September 1992, when sterling plummeted in value from 2.92 to 2.33 deutschmarks), voters never forgave the government of John Major, even though strong growth was restored within a year and the economy that Tony Blair inherited in May 1997 was robust.

Lessons from history

Sunak will have to call an election by January 2025 at the latest. It would make tactical sense to call it earlier since the appearance of hanging on to the bitter end deters a lot of voters. That is what happened to Major who called the May 1997 election at the last possible moment.

Voters do not seem to blame Vladimir Putin’s war in Ukraine for the cost-of-living crisis, with prices rising much faster than wages. Rather, they blame “the Tories”. They understand that petrol, diesel and gas prices are affected by external events, but many think that the government has played a poor game.

In 2010, Gordon Brown went into the election insisting that the financial crisis and the resulting recession was caused by the markets, not his mismanagement of the British economy. The voters decided that whoever had caused the problem, they wanted another team to resolve it.

In 2017, Theresa May lost seats to Labour because, with Brexit incomplete, she struggled to unite the Remainers, who supported the austerity agenda, with the Brexiteers, many of whom opposed austerity.

In 2019, the stars were more auspicious for the Tory party. Millions of Britons were fed up with the endless tedious arguments over Brexit and just wanted to “get it done”. Also, many were horrified at the prospect of Jeremy Corbyn becoming prime minister – more so than in 2017, given the accumulating accusations about antisemitism.

Ashcroft thinks that views about austerity are the best indicator of whether someone will vote Labour or Conservative. The view that the austerity agenda of the Cameron-Osborne years was damaging is now deep-seated. Furthermore, as Ashcroft has pointed out, the Truss experience shows that inept governments can be constrained by the financial markets. That, in turn, suggests that a Labour government under Starmer might not be blown off course by the ‘loony left’. Truss’s premiership has made the prospect of a Labour government less risky.

Sunak’s working majority of 69 is still substantial but may not be sufficient to govern if his backbenchers turn awkward. George Osborne told Andrew Neil last weekend that the Sunak government was “not in control of events”. Sunak’s to-do list includes housing (planning reform), energy policy (onshore wind farms), immigration (legal and illegal), foreign policy (how to deal with Russia and China) and the spluttering online safety bill (how to define what is “legal but harmful”).

If Sunak could tame inflation, get borrowing under control, reduce NHS waiting times and substantially halt immigration – a tall order – he might still be in with a chance in the last quarter of 2024. Unfortunately, however, 2023 is likely to be even more challenging than 2022.

Economic outlook

The OECD thinks that growth in the UK next year will be weaker than in any other G-20 economy apart from Russia, which is the target of a global regime of sanctions. The economic contraction will measure 0.4 percent next year and 0.2 percent the year after. Our inflation will be worse than any other G-7 nation, at an average 8.9 percent. It will then drop to 3.3 percent in 2024. British households will continue to face soaring food bills and rocketing mortgage payments, on top of higher taxes.

The UK is uniquely vulnerable amongst its peers for having desperate labour shortages (which I discussed two weeks ago) plus massive energy insecurity (which I have been discussing here repeatedly). We now have to compete with Germany and others for liquified natural gas and we have the lowest level of gas storage in Europe even if the Rough storage facility, which May closed, has now been reopened. While gas prices have attenuated of late, there are certainly further price shocks to come.

A fresh wave of strikes over Christmas will be followed by even more industrial action in the New Year by rail workers, postal workers, teachers, university lecturers and firefighters. We may be afflicted with power outages during the course of the winter. Overseas investment in the UK is still falling. There is no sign that our levels of productivity will begin to converge with those of our competitors.

What the Sunak government wants to achieve in terms of our trading relationship with Europe is unclear. The leak that the UK will seek a Swiss-style deal akin to membership of the European single market – which may or may not have emanated from the Treasury – has been rebuffed.

The next major electoral test will occur at the English local elections on 4 May 2023. If the Tories fare even worse than expected, there will be more ructions as the supporters of Boris Johnson regroup. In the closing chapter of May’s government, in May 2019, the Brexit party managed to wipe out the Conservative party at the last elections for the European Parliament. The Conservatives polled just 8.8 percent of the vote and were reduced to just four seats against the Brexit party’s 30.5 percent and 29 seats. The Reform party is now breathing down the Conservatives’ neck across the red wall and beyond.

The astonishing rise of the Sweden Democrats party is a case study in how a chaotic asylum system, in tandem with rising crime, can precipitate a political earthquake in a country famed for its liberalism and tolerance. The rise to power of the Fratelli d’ Italia party under Georgia Meloni in Italy shows how prolonged economic stagnation can undermine the existing political order.

The red-wall Tory voters feel duped. They thought they were voting for a populist party, only to find that it pays people to stay at home during health emergencies, is besotted with net-zero carbon (even though there won’t be enough electricity to power all the new electric vehicles), cossets illegal immigrants in seaside hotels and bows before the European Court of Human Rights. Next time, they will vote for a ‘real’ populist party.

The first-past-the-post electoral system for the House of Commons has sustained two main political parties – the Conservatives and Labour – in alternate partnership as government and opposition since 1924. But the collapse of the Liberal party in that year shows how this electoral system can doom a party once it falls below a threshold of support of around 20 percent.

Labour’s offer

Starmer now seems to be less cautious and more confident than during his first two years as Labour leader.

As I predicted here months ago, the issue of whether the UK should rejoin the European single market has now risen to the top of the political agenda. But Starmer was quite blunt last week. He told the Mail on Sunday: “A Swiss deal simply wouldn’t work for Britain…Ripping up the Brexit deal would lead to years more wrangling and arguing, when we should be facing the future”. He will not attempt to reinstate freedom of movement for EU citizens. This is at variance with his stance when he ran for the Labour leadership in early 2020 and indeed with his credo when he was shadow Brexit secretary.

The week before last, Starmer told the CBI that the UK must wean itself off immigrant labour. The days of “low wages and cheap labour” were over, he said. He now endorses the Tories’ points-based visa system for skilled workers. He aspires to more training and better pay. He wants to give the Migration Advisory Committee a greater role in policy making. He declined to call for a reduction in levels of immigration – which was a record 504,000 in the year to June.

Labour will cut taxes for “working people” when the economy stabilises, Starmer pledged last week: “It’s very important that we don’t make promises we can’t keep”. So far, so vague. Expect talk of wealth taxes and a transactions tax as we get closer to the general election.

Since last weekend, a new Labour policy has emerged which Starmer chose to showcase during Prime Minister’s Questions on Wednesday (30 November). The next Labour government will deprive private schools of their charitable status and force them to charge VAT at the full rate (20 percent) on their fees. To many, this smacks of a return to class war. Many middle-class parents who graft so that their children can attend a prestigious school would probably not be able to afford a 20 percent uplift in fees. Sources told the Daily Telegraph that 150-200 independent schools might have to close.

And who would gain? The estimated £1.6bn so raised, Starmer announced on Wednesday, would be ploughed back into state schools. But many doubt that any such funds would make much difference. Clearly, private (so-called public) schools are not-for-profit entities which exist to perpetuate a certain tradition of education for their pupils. If they are to be subject to VAT, then why not force charity shops, charitably-funded hospices, churches, mosques and animal sanctuaries to pay VAT too – and see how that goes down. No doubt medical treatments in the private sector would be subject to VAT as well. In my view, this was a piece of meat thrown to placate the Labour left – and one that Starmer will come to regret, as it will lose as many votes as it gains.

Like Blair, Starmer wants to build a coalition that will have two functions: it must sustain him in power for long enough to carry out his (still hazy) agenda; and it must contain the far left in a circle of wagons from which they cannot inflict harm. It is still not clear that he will achieve that. The overwhelming Labour lead in the polls is wholly down to disgust with the febrile Tories, and not at all to a rekindled love of the Labour brand.

Elephant in the room: the NHS

Over seven million British people are awaiting treatment from the NHS – and the Royal College of Nursing has taken this moment to call for the first ever strike by nurses. Ambulances take hours to arrive and now ambulance crews are considering striking too. There is rapidly rising demand for the NHS’s limited mental-health provision. Getting an appointment to see a GP is a challenge for millions of people – the average waiting time is now 10 days. Although the death toll from Covid-19 is in steep decline, excess deaths are still running at worrying levels. If that persists then life expectancy will decline, thus removing the rationale for raising the state pension age further.

The NHS has been claiming that it is underfunded since its foundation 74 years ago. Demand for health care will continue to increase as new medical technologies become available. Since demand for health care is unlimited and, under the founding principle of the NHS that it be free at point of use, it cannot be rationed by price. Instead, it is rationed by waiting lists.

It is now widely agreed that the French, German, Australian and Canadian private-insurance health-care models deliver better outcomes for their users than the NHS. Many voices have called for a royal commission to re-evaluate the NHS model. But if this Tory government were to establish one, everybody knows that it would be accused of planning to privatise health care for profit at the expense of the frail and the sick. It would just be too risky, politically speaking. When it was revealed that Scottish NHS executives had discussed making the affluent contribute towards their health care, Sharon Graham, general secretary of Unite, declared that “even discussing such a possibility is sickening”.

Therefore, the Tories who pay lip service to efficiency and to market economics cannot countenance reform of the NHS. All they will do is to continue to throw more money at it sporadically. Many traditional middle-class Tory voters understand this and have resorted to private medical insurance. Of course, it’s not a problem for the rich, such as Sunak, since they pay for private health care anyway. We now have an unofficial two-tier health-care system.

Markets

Whatever the political outlook, the markets seem relaxed about Sunak’s and Jeremy Hunt’s management of the British economy thus far.

This morning, the pound is trading at $1.2266 – its highest level since just before Johnson’s departure. IG says that 60 percent of its clients are net short on this trade. That tells us that a correction may be due, but no one really knows. The yield on 10-year gilts is down to 3.076 percent, despite warnings from Bank of England Governor Andrew Bailey this week that the gilt market “is not back to normal at the moment”. The FTSE 100 pushed above 7,550 this week.

The markets have not so much given a vote of confidence in Sunak-Hunt as shrugged their shoulders at the prospect of a Labour government in two years’ time. So, the markets are giving Starmer the benefit of the doubt. But, as the election gets closer, as 2023 and 2024 unfold, Labour’s offer will come under laser-like scrutiny. Market sentiment could change; though in an increasingly unhappy country, public sentiment is likely to change in only one direction.