9 June 2017

What do the election results mean for Britain’s economy?


Well, that was unexpected. So what does it mean for the economy? We’re going to have a Conservative government on 318 or 319 seats supported by 10 DUP MPs. If we assume that adds up to 329, they’ll be up against 313 other MPs in the Commons, since the Speaker won’t vote and the seven Sinn Fein MPs won’t turn up. That’s a majority of 16.

By comparison, in the last Parliament the Conservatives had 330 seats and the DUP 8, with two Ulster Unionists (who lost their seats this time) and four no-show Sinn Fein MPs so the effective majority when the DUP and UUP voted with the Conservatives (as they usually did) was about 35.

The Conservatives had no especial difficulty getting their business through. And an effective majority of 16 should be enough to get the Queen’s Speech and Budget passed by this one. So on a day-to-day basis the new Parliament may see little practical change.

Indeed, with no majority the Government is unlikely to seek to overturn the Fixed-Term Parliament Act, and with an overt hard-Left Socialist party getting 40 per cent, there will be little appetite – contrary to the widespread assumption – to test whether another General Election would deliver a different result.

DUP members would be very unlikely to vote against the Government if they thought bringing it down might lead to Jeremy Corbyn seeing power, given his history with the IRA. And so there is a good chance the administration will struggle on with its small majority for quite a long time – perhaps even five years.

As for Brexit, the DUP was always opposed to EU membership and supported Leave in the referendum. Its 2017 manifesto included plans very similar to the Conservative ones on leaving the Single Market and customs union, coming to some free-trade and customs clearing agreement with the EU, and avoiding a hard border with the Irish Republic. The DUP won’t provide any material barrier to the Conservatives in these areas.

But where the DUP might change things is over agriculture. Agricultural support is a much larger issue in Northern Ireland than in other parts of the UK. Any thoughts that Brexit might lead to a large reduction in agricultural support payments as we replace the CAP must now be gone (though the Conservatives themselves had committed not to do that in the next Parliament anyway).

There might also be implications for trade deals. There being no extra agricultural tariffs may now become a priority in the Brexit trade negotiations, whereas the DUP might be much more sceptical of agricultural tariff reductions being agreed with Australia, New Zealand, Canada or the US.

Economic risks associated with a second Scottish referendum are probably dead. The SNP proposal to have another referendum by 2019 looks very much like over-reach and appears to have been punished in the ballot box. Independence is dead for the foreseeable future (“foreseeable” these days, of course, meaning until about next Tuesday, but anyway…).

With such a small majority we can probably expect little to no further progress on deficit reduction for some time. There will probably be stasis on issues such as social care or winter fuel payments. Taxes probably won’t rise much. Indeed, there might even be some regional devolution of corporation tax to allow Northern Ireland and Scotland to introduce 12.5 per cent rates (as the DUP would like and as might play well for the newly-emboldened Scottish Conservatives).

I’d expect the deficit to sit about where it is (around 3 per cent of GDP) for the foreseeable future. That will mean little to no drop in the debt to GDP ratio. So if there were another big recession, UK debt to GDP could go from the mid-80s per cent of GDP up to 110 or 120 per cent very quickly. That could create economic problems down the line, but not immediately.

The bigger economic threat comes from the fact that 40 per cent of voters voted for a hard-Left socialist extremist, who has Communists for his closest advisors and an overt Marxist as Shadow Chancellor, whose likely economic programme would include all those hard-Left elements commentators had long thought inconceivable in Britain. Unless the Corbynista bubble bursts as quickly as it formed, when the electoral cycle turns and voters try out the Opposition, Britain may find itself run in an unprecedented way.

That, in turn, may affect the deals the UK can do. Who would do a deal with the Government if Corbyn could replace them any time? The UK can give no guarantees that it would stick to any trade or security arrangements that would not be acceptable to hard-Left socialists (i.e. none at all that Conservatives would find acceptable or useful).

Will Trump trust the UK enough to seek a deal any more? Will Australia want a deep relationship with a potential Corbynista government? Will the EU think we can credibly commit to any trade deal we might make with it or any 10-year “transitional arrangements” on the finance sector?

May can carry on for now. She might be replaced by Boris Johnson in a few months. But either way the Conservative programme is probably still implementable. The more fundamental problem is that, with the threat of a Corbyn government around the corner, the UK may find itself rapidly unable to do any sort of economic deal internationally.

Under these circumstances, maybe some Leavers might even start to wonder if Brexit is such a priority after all…

Andrew Lilico is an economist and political writer