17Capital International Analysis

The United Kingdom once appeared to be among the more stable, even most stable, of countries.

It has not seemed like that of late, especially in 2022. Between July 2016 and December 2022, the UK has found itself with five different Prime Ministers (David Cameron, Theresa May, Boris Johnson, Liz Truss and now Rishi Sunak). It has in the same period had the pleasure of seven Chancellors of the Exchequer (George Osborne, Philip Hammond, Sajid Javid, Rishi Sunak, Nadim Zahawi, Kwasi Kwarteng and now Jeremy Hunt). To top it off, there have been six Foreign Secretaries in this time (Philip Hammond, Boris Johnson, Jeremy Hunt, Dominic Raab, Liz Truss and now James Cleverly). The major offices of state thus seem to have an almost permanent “Situation Vacant” sign outside them. The House of Commons, despite a very sizeable Conservative majority, often appears anarchic. The economic consensus of old has all but disappeared and strikes have returned as a public endurance. Many in the private equity world, within the UK and outside of it, have looked on at events in horror.

What on Earth may explain this explosion of instability and will it become a new, unwelcome, norm?

A massively realigned electorate

It was not that long ago that it could be stated with confidence that the biggest single determinant in UK elections was social class and income levels. It was never true, but it was, even as late as 2010, the biggest single factor in operation. This served to shape parliamentary parties that were broadly internally cohesive as the electoral interests of MPs within both main parties were similar.

After coming close to doing so in 2017, the 2019 election broke this mould entirely. A Conservative victory was achieved with a larger share of social class DE votes than social class AB electors. Class has ceased to be the primary indicator of party preference. It has been replaced by age with the additional twist of the level of education attainment (as the massive increase in the numbers who have experienced higher education did not start until the 1980s, comparatively few people over the age of 65 will have degree certificates). The tweak – entirely counter to the historic position – is that those with the strongest formal qualifications are now disproportionately inclined to support Labour while those with the most modest formal qualifications are disproportionately for the Conservatives.

This division manifested initially in the 2016 Brexit referendum and then duly repeated itself in 2019. The size of the Conservative win was down to fear of Jeremy Corbyn allowing them to retain enough anti-Brexit, socially liberal Tories (mostly resident in southern England) who had been attracted to David Cameron while bolting on a new band of pro-Brexit, socially conservative ex-Labour electors.

Both parties need to balance their traditional supporters with their new, unexpected, recruits. As the Conservatives have the most seats, they have the largest current dilemma as they attempt to keep the old “True Blue” and the new “Red Wall” citizens mutually satisfied. If Labour were to be even the largest single party after the next general election, never mind what would occur with a full majority, they would have a mirror image of the same issue to contend with. This massively realigned result in voting inevitably feeds through to the composition of the parliamentary parties. They have far less in common internally than they once had (notably the Conservatives) and so are much more impulsive. Hence the leadership elections or challenges via a vote of no confidence for Conservatives in 2016, 2018, 2019 and 2022. Labour has fared a little better with such battles only in 2015, 2016 and 2020.

Constitutional fracturing

The UK, along with Israel and New Zealand, is among the very small set of nations without a single, codified, constitution. Israel and New Zealand have, however, partial constitutional accords that the UK does not. For a long time, this seemed to be something of an asset for the UK in that it meant that there was an element of flexibility that other political systems had denied themselves. It is not at all clear that it is such an advantage today. It may have become a major cause of recent instability.

The UK as of 2022 is neither the central, unitary, state that it was before 1997, nor is it a federal one. Substantial devolution of different forms has occurred for Scotland, Wales, Northern Ireland (when local political leaders can agree to collaborate) and to a much lesser extent to some English cities via directly elected mayors. This has been a piecemeal, even scatter-gun, process. It is a bit of a mess.

The biggest element in all of this has been the electoral popularity of the SNP in Scotland, initially in Holyrood elections, but since 2015 in the House of Commons as well. The unforeseen consequences of all this were revealed starkly when COVID-19 struck the country. Health was a devolved sphere of policy. Nobody had thought about what this might mean in the context of a pandemic. The UK had a majority Conservative Government notionally nationally, but in practice only in England absolutely. Although the policies pursued in response to the pandemic were not wildly divergent, they were at times clearly at odds and there were periods when the internal borders of the UK were all but shut.

The “Scottish Question” has hung over UK politics and driven the determinants of devolution for a decade. It has made the implementation of policy on a UK basis harder and entrenched instability.

The post-GFC (Global Financial Crisis) UK economy has ceased to function as it initially did.

Before the GFC there had been a lively debate among economists as to whether the “trend rate” of growth in the UK was 2%, 2.25% (the officially accepted figure) or 2.5% (which Gordon Brown when Chancellor at one stage was inclined to embrace). If so, then the performance of the economy from 2011-2019 was, bluntly, underwhelming. It only clearly exceeded 3% once (2014) and was often (five times) below 2%. It was notably weaker than the average rate recorded in the two previous decades.

In ordinary circumstances, sub-par economic growth would trigger more unemployment. In the years running up to the pandemic it did not. Unemployment was more likely to fall than rise. Why? The explanation is that employees were willing to accept stagnating real incomes and/or work fewer hours in exchange for reliable employment. That decision was cushioned by low inflation (especially for essentials such as food, clothes, and energy costs) and very low interest rates (suppressing mortgage expenditure with a knock-on effect on the rental market). Employers were content with this accord as they could defer expensive capital investment in favour of continued cheap labour.

There were mandarins in the Treasury who intensely disliked the implications of this for productivity and many trade union leaders who considered it to be a duff deal for the workers. Yet the pact held. Despite subdued economic growth, employment was high, and inflation stayed firmly under control.

The pandemic, followed by the impact of the Russian invasion of Ukraine, has torn up this rule book. Labour markets are tight due to the combination of overseas workers returning to their home places when COVID-19 shuttered the economy, the so-called “Great Retirement” and a surge in the level of the economically disabled sick largely due to the long-term effects of the virus. Inflation has soared to rates not seen since the 1980s. Interest rates have begun to shift back towards those which were at the lower end of the spectrum before 2008-2009. The attempt by Prime Minister Liz Truss and Chancellor Kwasi Kwarteng to reverse this via unfunded tax cuts died at the hands of a plummeting pound, surging mortgage rates and pandemonium among pension funds.
Tight labour markets, rampant inflation, and the end to an era of exceptionally low interest rates are hardly the formula for cohesion and stability. The increased use of strike action is a logical reaction.

Is there any precedent for any of this in the UK?

Yes, and despite it being a long time ago, one hundred years to be precise, it is surprisingly relevant and not a discouraging one. If anything, it is a reminder that what seems to be unique often is not.
The period between October 1922 and November 1924 (a third of the aforementioned discussion about July 2016 to December 2022) makes contemporary uncertainty look somewhat mundane, yet the forces behind what happened then really have a lot in common with where we are at present.

Between October 1922 and November 1924 there were five switches of Prime Minister (David Lloyd George, Andrew Bonar Law, Stanley Baldwin, Ramsay MacDonald, and Stanley Baldwin once more). There were also five different Chancellors of the Exchequer. There were general elections conducted in 1922, 1923 and 1924. We have had it easy this year if that time-period is considered the yardstick.

What caused this? First, there had been a massive transformation in the electorate. World War I had accelerated the timetable upon which all adult men would be awarded the franchise and prompted the partial acceptance of votes for adult women (not fully there until 1928). The political parties of that age did not know how to respond to this new landscape and various strategies were adopted with variable results. A new party (Labour) entered the mainstream. An old one (Liberals) imploded.

The constitution was also in a state of convulsion as most of Ireland insisted on departing from the rest of the United Kingdom, this was a shock to the system which was much more intense than the Dominion status awarded to the likes of Australia, Canada, and South Africa inside the Empire.

The entire nature of the pre-1914 economy was also totally upended. The 1920s started with a brutally steep recession and then a weak recovery which meant that economic growth averaged 1.4% over the ten years. Although the decade began with a constricted labour supply (due to the death and disability of more than a million men in the war itself and then another wave of fatalities for which the Spanish Flu epidemic was chiefly responsible), the sharp collapse of the economy was the catalyst for both enormous unemployment and industrial militancy symbolised by the General Strike of 1926. The one compensation was that price levels fell sharply, so those in work often felt rather better off. A bitter argument, nonetheless, took place over the merits of free trade or tariffs.

Instability in the UK is probably a transitional feature and is not a new normal

The evidence from the 1920s combined with far more contemporary strands of data, including the spectacular volte face in October which saw the Conservative Party at the parliamentary level opt to install without a contest a contender (Rishi Sunak) which its own membership had rejected after a comprehensive series of hustings and a mass election, suggests that the instability which has been on display in the UK so publicly of late is not an indicator of a prolonged period of similar weakness. There are reasons to conclude that the past few years have at heart been a process of transition and a response to the external shocks of the GFC, the Brexit exercise and now those of the pandemic.

Parties adapt to electorates

Political parties initially struggle when the electorate realigns in a forceful and unexpected fashion. They do, though, in the UK at least, have a history of adjusting to such change in reasonable time. It will take another general election for it to become clearer whether 2019 and the displacement of social class and income levels by age and educational attainment was something of a one-off best understood as the final part of the “Get Brexit Done” drama, or a more fundamental development. Only when this has been resolved will the two major parties fully reconstruct themselves to adapt to this new order. The acid test for an election in 2023, 2024, or at a stretch January 2025, is not which side wins but how different the social composition of those who vote for them and the seats that they secure are, or are not, from those of the general elections of 2005 and 2010. A Labour victory with a support base that is highly distinct from its last majority in 2005 should be seen as powerful an indicator of post-class electoral politics in the UK as any further Conservative triumph would be. The core point is that, just as the 1920s, political parties have the capacity to meet new conditions.

A Scottish resolution?

The constitutional quagmire is harder to resolve, and it may take a full-blown effort to produce the sort of single written document which not only virtually all other countries but civic organisations throughout the United Kingdom have managed to draft for themselves without too much anguish. The open wound now is Scotland and on that front the prospect for some resolution is in sight, albeit one which is bound to leave a large number of people dissatisfied one way or the other.

By 2025, one of a small set of possibilities will surely have occurred. The first is that there is another plebiscite north of the border and independence is adopted by most Scottish citizens. That will lead to a process of disentanglement which will be complicated, costly, and potentially chaotic. It would be painful, but it would end the matter. In many ways it would be less traumatic than Ireland was in the 1920s. There would not be the background of violent insurrection nor internal partition.

The second scenario is that another referendum is held but the voters choose to stick with the UK again. That would draw a line under the matter (just as an extremely close vote to remain in Canada at the second time of asking has done in Quebec). The SNP will not be able to say: “third time lucky”.

Finally, the SNP, which has had an extraordinary hold on domestic Scottish politics, might run out of steam with the independence cause losing momentum with it. Having declared that she will view the outcome of the next UK general election as a de facto referendum on whether to hold a referendum, the First Minister may find that the SNP loses seats to the Unionist parties and that the mandate that she has sought to obtain simply has not materialised. If so, constitutional instability would then ease. The possibilities of this last prospect coming to pass are probably being underestimated at present.

Inflation may abate

The final aspect of instability is that of the economy. A deep recession, entrenched inflation and a move to significantly higher interest rates would hardly help the restoration of order. The Bank of England has hardly done much for the cause of sunlight here. The tone adopted by Jeremy Hunt in his Autumn Statement and elsewhere has been similarly sober. Expectations have been lowered.

Much depends on how the Russia-Ukraine conflict evolves over the next year or so and the internal politics of the Russian Federation. The worst case is that the economic dislocation of 2022 persists. There is also a better prognosis available as well. Fighting out on the front line would grind to a halt. Moscow elites beyond Vladimir Putin himself may start to recalculate their interests. Other factors which have stocked inflation of late (in particular supply chains which have been badly disrupted initially by the pandemic itself and then the Zero-Covid stance adopted by the Chinese Government) may also become considerably less challenging. The appetite for industrial action may well diminish.

In this more encouraging (and by no means fanciful) situation, the economy might prove resilient. UK inflation may peak earlier than the Bank of England has forecast, and it could well fall back to more normal rates rather more swiftly than the Office of Budget Responsibility has outlined. It is extremely unlikely that interest rates will go down to the levels of the decade after 2009 but if they were to stabilise around the 3% mark (a lot lower than was usual in the 1970s, 1980s and 1990s), then the economic readjustment required would not be negligible, but it should be manageable. There would remain hard economic issues to address (most of all productivity) but there always are. The discussion over which direction to take would see Conservatives and Labour disagree but mildly. In these circumstances, the next general election would be more competitive than it looks right now.

Stability revisited

The extraordinary instability in British political life endured over the past six years and so vividly over the most recent six months has been an unwanted rollercoaster ride for much of the population. It has not been a random event but one with identifiable causes – electoral realignment, constitutional strains, and economic upheaval – for which there are plausible solutions that could restore stability. International private equity funds can be forgiven for exercising some caution about investing in the UK amidst such uncertainty. They would be unwise not to be ready to reassess matters during 2023.