Will it be May, Corbyn or a “coalition of chaos”? As we went to press, we didn’t know. But there were some safe predictions to make, says John Stepek.
As MoneyWeek goes to press, the country is going to the polls. By the time you read this, we’ll know who will lead the UK for the next few years (barring any more surprise elections, which, sadly, we can’t rule out at this point).
We’ll know if Theresa May made a massive miscalculation when she decided to go for the snap general election, or if Jeremy Corbyn’s polling comeback was all about the noisy yet elusive “youth” vote. And we’ll know which polling companies are massive shorts, and which you should be paying attention to for next time. But whatever we’ve woken up to on Friday – a Tory landslide, a hung parliament, or a “coalition of chaos” – we can already make a few pretty safe predictions about the themes that will help to shape the course of politics over the coming years.
1. Bigger government
We’re looking at a bigger, more interventionist government than we’ve been used to in recent years. Whether it’s through moral suasion and tighter regulation, or full-blown renationalisation, one way or another companies are not going to be allowed to conduct “business as usual”. Some sectors will be more vulnerable than others (for example, an intriguingly timed paper from Greenwich University, cited in the Financial Times this week, claimed that privatising the water utilities had cost consumers £2.3bn a year more than keeping them in public ownership). But even the big, international players will be affected. The debate over tech companies and their responsibilities for the content they provide a platform for (see page 14 for more) is just the start.
There will be more scrutiny of takeover bids for companies deemed vital to the national interest (which can, of course, mean anything from genuinely important to merely headline-grabbing). Corporate boards will feel increased pressure over everything from executive pay to worker representation to debates over precisely how high the minimum wage should be. That’s not necessarily a bad thing, but the problem with political intervention is that it is often poorly thought through, tends to create skewed incentives and is as much dictated by how it will look on TV as by any actual practical benefit.
Britain is far from alone in this growing desire to force corporations to contribute more. Across the world this month 70 countries signed a pact to crack down on international tax avoidance. It’s all part of the OECD group of rich countries’ efforts to prevent multinationals from using elaborate schemes to play national tax systems off against one another. All of this is likely to mean a squeeze on corporate profit margins, as companies find themselves being expected to do more of what might be described as “social policy” heavy lifting than they have been.
2. Higher taxes and borrowing
Bigger government costs money. So that means we can expect higher taxes and yet more government borrowing. Just to get a bit of perspective on this, former chancellor George Osborne had aspired – as recently as late 2015 – to balance Britain’s annual budget by the 2019/2020 tax year. Indeed, we were meant to bring in £10.1bn more in tax than we spent that year. That’s changed somewhat, to say the least. The earliest we’ll even be thinking about balancing the budget now will be closer to 2025/2026 – and that’s so far into the distant future (in political terms at least) that it might as well be never.
Our concern is that – whichever party gets into power – someone is going to have to pay for this. There’s only so much money that can be raised from cracking down on tax avoidance (see above) and targeting “the rich”. So it’s likely that borrowing will have to take the strain. At the moment, the gilts market (which reflects how willing investors are to lend to the UK government, and at what price) couldn’t care less about the election. And while there might be a blip if Labour takes power, we suspect that – for now, at least – markets have been so well-conditioned to “buy the dip” on political shocks, that any predictions of a “gilts strike” or a sterling crash would be well wide of the mark. The danger, however, in the long run, is that interest rates and inflation won’t always be as low as they are today (if they are, that suggests something else will have gone badly wrong with the economy) – in which case, markets may not always be as accommodating as they are today.
3. The generation war
If the general election campaign proved anything, it’s that you don’t mess with the pensioner vote, and you don’t mess with a British citizen’s right to pass huge chunks of property-related wealth to the next generation. May’s proposal that anyone with less than £100,000 in wealth wouldn’t have to pay for social care, and anyone with more than that would have to use their money, but could defer selling their house to pay the bill until they died, was by any measure an extremely progressive policy. It asked the very well off to pay for their own care (rather than using taxpayers’ money to do so) and left the not very well-off entirely unscathed. However, the reaction forced a rapid U-turn.
Yet May’s abortive efforts to tackle just one small corner of this problem, as well as her promise to turn the “triple-lock” on pensions into a “double-lock”, demonstrate the direction of travel. As the Institute for Fiscal Studies points out, the UK is likely to need an extra £100bn a year by the middle of this century just to deal with our deteriorating demographic picture. Younger people, meanwhile, feel extremely hard done by, with house prices in many areas beyond their reach, and the gilded retirement offered by a defined benefit pension scheme pretty much gone (from the private sector, at least). Don’t be surprised to see future attempts to unlock the housing wealth held by the older generation – potentially in the form of incentives to downsize, or a more straightforward wealth tax. As for those who are yet to retire – the state pension age is only likely to increase more rapidly than any of us expect as it becomes increasingly unaffordable.
4. What about productivity?
One thing is fundamental to making any real progress tackling the other problems we’ve outlined above, and that’s the UK’s persistent productivity problem. Productivity in the UK was hammered by the financial crisis. Only now has output per hour just about returned to its pre-financial-crisis level, but it’s still well below rivals such as the US, France and Germany, and about 16% below the G7 average.
As Chancellor Philip Hammond pointed out in last year’s Budget, “it takes a German worker four days to produce what we make in five”. Employment has risen strongly, but we’re not producing anything more per hour worked than we did in 2008. As Jagjit Chadha of the National Institute of Economic and Social Research points out: “It is as though the economy, rather than working smarter, has simply been working harder.”
Without major improvement, it’s hard for wages to pick up and living standards to get better. The trouble is, solving the productivity puzzle isn’t easy (or quick) to do. While politicians pay lip service to it, as private-equity investor Guy Hands tells Bloomberg: “It’s like watching a business which has a real fundamental problem, and the CEO is saying: ‘What packaging should we use?’” Our own view is that, among other things, addressing the skewed incentives created by our overly complicated tax system (notably our treatment of debt versus equity) would help a great deal (see the editor’s letter for more ideas). But that doesn’t look to be on the cards.
5. Brexit means Brexit
The general election has revealed at least one thing: the majority of Britons either remain sanguine about their vote to leave the EU, or are resigned to the idea that the UK has voted, and should now “get on with it”. That’s one reason why there wasn’t a huge amount said about Brexit during the election. The other is that, for all the talk of “soft” and “hard” Brexits, as Pieter Cleppe of Open Europe puts it, “there aren’t so many different ways to implement Brexit”.
Overall, Britain wants an end to freedom of movement, and thus to membership of the single market and customs union, but all the while maintaining a close trade relationship with the EU. The only real questions are: how much might that trade deal cost and what will it consist of; and what rights will EU citizens in the UK have, and UK citizens in the EU continue to have? The eventual outcome probably depends as much on the shape of the European political landscape after the German elections in September and the Italian elections next year, as it does on our own general election.