The Hawthorn Headliner

Welcome to the second edition of Hawthorn Advisors’ political newsletter – our take on political and policy issues. The team at Hawthorn Advisors will delve into UK politics and provide you with insights and analysis as we approach the General Election.

If you’d like to subscribe, please do so using this link, and if you’d like to speak to Hawthorn about our Political Advisory offering, please email Mark Burr at [email protected].

Economic reality risks ruining the party games

Inflation down (3.2 per cent), wage growth up (6 per cent) and economic growth restored (0.6 per cent GDP growth over Q1) - so are champagne corks popping in Downing Street? Put the bubbly back on ice. Firstly, "we're no longer in recession" isn't the rallying cry some people think it is, and the rapid pace of wage growth - while undoubtedly good news for workers - is ringing alarm bells in some quarters, given the impact it might have on inflation and, therefore, interest rates.

The UK unemployment rate is also steadily increasing, with hundreds of thousands of long-term sick people now almost certain to become Labour's problem. The Government's message is understandable: stick with us, the plan is working, and don't risk it by letting Labour back in. The problem is that this approach is akin to standing in the middle of a biblical flood and telling everyone that you think the sun is beginning to burn through the cloud. They might be pleased to see it, but they have more immediate concerns.

In 1997, the opinion polls were clear that John Major was facing electoral defeat, with Tony Blair's New Labour poised for power. The fact that Major could point to an economic rising tide made no difference to his fortunes, and he ultimately bequeathed a fundamentally strong economy to his successor. The data might have painted a decent picture, but the public were in no mood to reward the Tories. They'd been in power for too long, riddled with internal divisions, their Prime Minister (despite electoral success in 1992) was gravely weakened, the party's reputation for economic competence had been undermined by events and the mood of the country had shifted. Is history about to repeat itself?

A narrative of economic revival may benefit the opposition more than the Government, adding to a sense of renewal and a change of direction rather than shoring up the incumbents. But other than some modest GDP growth and a more temperate inflationary environment, what kind of economy would a Labour government inherit?

That the Conservatives have made some economic missteps is not in doubt, but none have been as consequential as the cost of the pandemic. We don't like to talk about it, but the Government's pandemic response came with a price tag approaching ￡400bn. In 2020/21 the state spent ￡200bn more than it had budgeted. This is to say nothing of the cost to the Treasury from the wider economic collapse, the loss of growth and the deep economic scarring, and it doesn't take into account the many tens of billions then spent in response to the global energy price shock. This is real money, and the consequences of such unprecedented expenditure will be felt for decades, most immediately in the form of higher taxes - regardless of who wins the election.

So, while the Tories can forget about voters rewarding them for a modest uptick in public finances, so too can Labour dismiss the idea that they'll be able to turn on the spending taps the moment they take office. After the 2010 general election, the outgoing Chief Secretary to the Treasury famously left a note for his Conservative successor: "Sorry, there's no money left." The current occupant of that office might very well end up reaching for the same sentiment.

Given that Labour has ruled out any hikes to income tax, the smart money says they'll be looking at raising revenue through relatively less politically sensitive reforms in areas such as wealth, dividends, and capital gains in addition to policies already announced on private school VAT, non-doms and tax avoidance. All governments sneak in stealth taxes. Gordon Brown was famous for it, and the current government has allowed fiscal drag to do the heavy lifting. If Labour targets wealth, capital, and dividends for tax increases, will it do it without fanfare or instead seek to benefit from the political dividing line that such moves would open up?

As the election approaches, the Conservatives will continue to treat the economic recovery like a Ming vase - "don't let anyone else touch it" - but we also know they'd like to make a big retail offer on tax cuts, whether ahead of the election or as a future aspiration. Chancellor Jeremy Hunt dipped his toe in these waters with hints about a potential abolition of National Insurance at some point in the future, but the idea has allowed Labour to warn about the "black hole" such a move would produce in the public finances. In short, we're starting to see the coming economic debate take shape, but we should all keep a close eye on the details and take any pre-election promise with a pinch of salt. The parties may feel liberated by the rush of political battle, but they will be constrained by economic reality.

Policy spotlight – defence

In each edition, we'll offer our expert view on a key public policy issue.

This week, the battle lines were drawn on defence policy. The Prime Minister reiterated his pledge to increase defence spending to 2.5% of GDP in six years by shrinking the civil service. He also delivered a barb about the UK being less safe under Sir Keir Starmer.

Defence Secretary Grant Shapps was also out in force at the First Sea Lord’s Sea Power conference, where he heralded a “golden era of shipbuilding” for the UK. However, there is some debate as to how many ships this will actually amount to, with shaky promises of “up to 28 new ships and subs” and “up to six new warships”.?

A strong defence policy was once a hallmark of the Conservative Party. At the time of the Falklands War, the UK spent over 5% of its GDP on defending the realm, and despite the world being no less dangerous with conflicts raging today in the Middle East and Ukraine, it is currently less than half of that, just meeting NATO’s 2% guideline.

This decline in spending has been criticised not least by Conservative Party members, three-quarters of whom backed defence spending over tax cuts regarding the Budget earlier this year.

While the Conservatives wrestle with this identity crisis, Labour has taken steps to overhaul its own reputation in this policy area. Shadow Defence Secretary John Healey affirms the Party’s unshakeable commitment to NATO and chimes in with criticism of the declining Tory defence budget.?

According to polling from The Mail, this appears to be working, with 34 per cent of people saying they trust Labour more on defence and security, compared to 23 per cent for the Tories.

However, while Labour is talking a good game, with its attacks on the Conservatives for shrinking the Army to the ‘smallest size since Napoleon’, there is little policy differentiation. John Healey said the party would match the Prime Minister’s plan to boost to 2.5% and the current level of lethal aid provided to Ukraine.

However, a plan to meet these targets is yet to be put forward. What many would agree is that the 2.5% figure pales compared to what we are up against – a Russian state that is spending 40% of its state budget, and 6% of its GDP to rebuild and sustain its armed forces.

Data room

New polling from JL Partners suggests that if controversial Brexiteer Nigel Farage joined Reform UK, the challenger party would surge in the polls while the Tories would slip from 26 per cent to 21.