The UK Election - A Change of Government!

Welcome to Finance Friday.

Yesterday, Thursday 4th July, the UK population voted in a general election. The polls closed at 10 pm UK time yesterday evening and vote counting began immediately. Many results came in overnight with the final results expected today.

However, it is already clear that the Labour Party have won the election and that the United Kingdom has a new Prime Minister, Keir Starmer.

Let’s take a look at the recent political history in the UK, what we can expect from the new government and consider any potential implications for business and the economy.

Understanding the UK General Election

The UK general election is held at least every 5 years to elect 650 Members of Parliament (MPs) to the House of Commons in Westminster, London. Each MP represents a geographic constituency and his or her position in government is known as a seat. If a party wins more than 50% of seats (more than 325) they have an overall majority and the leader of that party will become Prime Minister. If no party wins more than 50% of the seats then two or more parties will try and form a coalition with the leader of the biggest party usually becoming Prime Minister.

Coalition governments are uncommon in the UK because there is no proportional representation (PR) in UK General Elections. Proportional representation is when the parties are represented in parliament in proportion to the proportion of people who voted for them. If the UK does not have proportional representation what system does it use?

First-Past-The-Post (FPTP or FPP)

First-past-the-post is a voting system where a member of parliament is elected because they get more votes than anyone else in the area that they want to represent. This means that it is possible for relatively small changes in votes cast for each party can result in huge changes in the number of MPs for each party in parliament.

Recent History - The 2019 UK General Election

The Conservative Party won the last UK general election in 2019 with a majority of 80. Boris Johnson remained as Prime Minister. The Conservative Party are on the right of the political spectrum.

After several scandals and controversies, Boris Johnson resigned in 2022. He was succeeded by Liz Truss who herself resigned after just 50 days due to economic turmoil and loss of Conservative Party support. Liz Truss was succeeded by Rishi Sunak who served less than 2 years as Prime Minister.

The 2024 UK General Election

Prime Minister Rishi Sunak called the 2024 general election on the 22nd May 2024. The polls were open from 7 am to 10 pm on Thursday 4th July. There was an election campaign lasting six weeks. Many prominent Conservative MPs lost their seat including former Prime Minister Liz Truss.

A New Government - Labour Party

Keir Starmer’s Labour Party have won a landslide victory. The Labour Party is currently a centre-left political party (it was further left under its previous leader, Jeremy Corbyn, who never won a general election).

Keir Starmer is, therefore, the new British Prime Minister. He will spend this weekend appointing his new Cabinet. Most of the appointments are expected to carry over from his shadow cabinet.

The Labour Party were last in power from 1997 to 2010 under Tony Blair (1997 - 2007) and Gordon Brown (2007 - 2010).

Reasons for the Result

It should also be acknowledged that the large shift in the majority is not mirrored by a significant change in vote percentage due to the first-past-the-post system.

There will be many reasons why individuals have moved their vote away from the Conservative Party. Some of them may be as follows:

• Brexit - The 2016 Referendum to leave the European Union was very divisive. The Conservative Party was traditionally a mixture of pro-European and Eurosceptic supporters. In 2016, they alienated the Remain-supporting voters by calling the Referendum. After the 2019 general election, they alienated the Brexit-supporting voters when the promised benefits of Brexit were not, and could not be, delivered.

• Bad Leadership - Boris Johnson was a poor Prime Minister who resigned after many of his Cabinet Ministers resigned from his government. Johnson had been involved in illegal parties during lockdown and had been accused of lying in Parliament. Liz Truss only lasted 50 days in government after introducing a budget that nearly destroyed the UK economy. Rishi Sunak was arguably more stable as a Prime Minister but not very impressive politically.

• Corruption - there were numerous scandals during the COVID-19 epidemic when government ministers were accused of favouring friends to award large government contracts. One in five government contracts had signs of possible corruption according to a report by campaign group Transparency International UK.

• Reform UK - Reform UK did not participate in the 2019 election to give Boris Johnson a better chance to win and implement his Brexit plans. They did stand in 2024 and have arguably split the Conservative vote taking votes from the right and far right side of the political spectrum.

Challenges for any UK Government

The UK is facing some difficult challenges at the moment. These would be difficult for any government to resolve and will take time.

• Ageing population - like many countries the UK has an ageing population which is putting strain on the National Health Service (NHS), which is free at the point of use, and social care. The Labour Party has traditionally been focused on maintaining a strong NHS.

• Rising government debt - government debt is rising as the country recovers from the effects of Covid and the economic effects of Brexit. However, current taxation levels are already high, as detailed below.

• High Taxes - the current level of taxes in the UK is currently very high by historic standards making it politically tricky for the new government to raise taxes further. The Labour Party have ruled out raising income tax, national insurance or VAT.

• Slow Growth - the UK has suffered from slow economic growth since the financial crisis of 2008. The Labour Party are hoping that increased growth will lead to increased tax revenues without raising the level of taxes

• Brexit - the UK is still deeply divided after the 2016 Referendum to leave the European Union. I expect that the Labour Government will want closer alignment with the EU but has ruled out rejoining the EU, the Single Market or the Customs Union.

• Immigration - immigration continues to be a contentious subject in UK politics leading to the rise of far-right parties such as Reform UK. At the same time, after the UK left the EU, the UK now has a shortage of manual workers in sectors such as hospitality, health care and agriculture.

What does this mean for the Future of UK Politics?

A large majority should mean political stability for the UK for the next 5 years. Markets, naturally, tend to prefer stability to uncertainty. It will take months and years to see the impact the new Labour government has on the problems mentioned above.

Other things to watch are:

• The future of the Conservative Party - after such a big defeat will the Conservative Party move further to the right or towards the centre?

• The rise of Reform UK - Far-right Reform UK got a significant number of votes but very few MPs - will they join the Liberal Democrats in calling for proportional representation? Will they try and take over or replace the Conservative Party?

• The future of the Union - the SNP did extremely badly in this election. Does this mean the end of Scottish independence, at least in the medium term?

All these questions will be answered in due course. in the meantime, there will be a lot of political head-scratching while winners and losers reassess their positions.

Do you have any questions about the UK Election?

Glossary:

General Election - noun - an election in which the population of a country vote to choose a government

Constituency - noun - a geographic area represented by a Member of Parliament

Seat - noun - an official position as a politician or a member of a group who control something

Coalition - noun - the joining together of political parties or groups for a political purpose, usually for a limited time, or a government that is formed in this way

Proportional Representation (PR) - noun - a political system in which the parties are represented in parliament according to the number of people who voted for them

First-Past-The-Post - adjective - a voting system where a member of parliament is elected because they get more votes than anyone else in the area that they want to represent.

Landslide - noun - in a UK election a landslide is the winning of an election with a large majority of seats. Because the UK does not have proportional representation, a landslide does not necessarily mean there was a large majority of vote share (every seat could, in theory, be won by one vote leading to a 650-seat majority).

Cabinet - noun - a small group of the most important people in government, who advise the Prime Minister or President, make important decisions and usually run a government department e.g. Home Secretary, Foreign Secretary, Chancellor of the Exchequer etc

Shadow cabinet - noun - a small group of opposition spokespeople who, under the leadership of the Leader of the Opposition, form an alternative cabinet to the government. The members shadow or mirror the members of the actual Cabinet.

Do you have any Business English questions?

Please email me and I will do my best to answer them in future newsletters.

Until Monday - have a great weekend!

Iain.

www.communicateenglish.com

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