Understanding the UK Election

Two thirds of the way through the UK’s summer election campaign, the Labour Party maintains a strong lead in opinion polls but the size of the next government’s majority and what that might mean for policy is less clear. Nico FitzRoy, partner and senior Europe analyst at Signum Global Advisors, shared his insights with us. Here are 5 key takeaways:

• Will Labour capture a large majority or win in an historic landslide? That’s the big question ahead of the July 4 election. Labour leader Keir Starmer has run a cautious and largely gaffe-free campaign in contrast to that of Prime Minister Rishi Sunak. But neither campaigning nor party manifestos have altered the underlying dynamic of the race, which is a broad desire for change after 14 years of rule by an increasingly divided Conservative Party. Polls show the Tories losing support most in constituencies they have historically dominated, which could hint at a wipeout. Tactical voting intentions also appear to be hurting the party since the campaign began with Brexiteer Nigel Farage’s Reform UK party luring right-wing voters from the Tories while the Liberal Democrats are pulling away moderates. That said, Sunak may benefit from so-called ‘shy Tories’ reluctant to express their support to pollsters even if they plan to come out on polling day. Nico said Signum’s base case is that Labour will win 430 seats and the Conservatives 130, which would give Starmer a bigger majority than Tony Blair won in either 1997 or 2001.
• Whatever its majority, the new government will face serious constraints. Despite a good first quarter showing, Britain’s economy has recovered more slowly from the pandemic than most advanced countries and public debt has ballooned to a 60-year high of 100% of GDP. That’s a far cry from the economic boom and near-balanced government budget that Blair inherited in 1997. Starmer and shadow Chancellor Rachel Reeves have pledged not to raise taxes on working people and focus instead on driving long-term growth through a stable business environment, reform of the planning system, and ramping up investment in green energy. None of those are quick fixes and that could frustrate the party’s left wing, which could act as the effective opposition after a landslide. We should get a better sense of how the government plans to manage these tensions in the autumn statement. But Labour’s policy objectives suggest a tax hike will be needed at some point in the next parliament, with capital gains a likely candidate.?
• Business should seize the opportunity to help shape Labour’s agenda, particularly on industrial policy. There is window for influencing policy between the election and the autumn statement, and Labour is virtually asking business to climb through it. Its manifesto calls for “an enduring partnership with business to deliver the economic growth we need,” which would mark a change both from the Keynesian approach of old Labour and the neoliberalism of Blair’s New Labour. The party has committed to engaging with industry on its economic agenda and conducting policy reviews, and Labour’s proposed national wealth fund for decarbonising the economy relies heavily on catalysing private investment.
• Labour will look to find new allies abroad and revive old friendships, particularly in Europe. A large majority would help shadow Foreign Secretary David Lammy assert Britain’s voice and flesh out his approach of progressive realism. He has talked of engaging with China on climate risk and the green transition. Realism also suggests an effort to develop closer ties with Gulf states that can provide the UK with much needed capital, even if that draws criticism from progressives on Labour’s back benches. Closer relations with Europe will be the top priority, though, even if talk of undoing Brexit remains verboten. Labour will want the UK to play a role in the European Union’s budding defense industrial strategy. A tilt to the hard right on the continent could complicate Lammy’s task, though, especially if Marine Le Pen’s National Rally enters the French government after their parliamentary elections. And the special relationship could become especially tricky depending on the outcome of the US elections in November.
• Can the center-right hold in Britain? Farage’s decision to run as the head of Reform UK should take enough votes to cap the Tories at 150 seats in the next Parliament, and perhaps reduce it to fewer than 100 seats. In the former case, the Conservatives would face a long road to recovery and need to resolve some fundamental questions about its leadership and vision for the country. In the latter case, the party could be ineffective as the main opposition and potentially vulnerable to a split or even a reverse takeover by Farage. That would be the country’s biggest political realignment since moderates broke away from Labour to form the Social Democratic Party in 1981.