UK’s Conservative Outright Majority: False Security

Over the past few weeks, as the UK’s general election neared and leading parties appeared neck-in-neck, political commentary aligned on one key issue: the country would certainly require another coalition government to hold majority in Westminster. On May 7, the UK’s Conservative party surprised pollsters, politicians, economists, and voters alike by winning an outright majority in the general elections. David Cameron will thus remain Prime Minister and the Conservatives will take full control of Parliament at the end of May. This is an impressive electoral result, and it will create a more stable Parliament on the face of the UK’s governance system.

As a result, companies can anticipate the maintenance of current, business-friendly economic policies over the next five years. In the lead up to the election, the Conservatives proposed a corporate tax rate cut, which would reduce business taxes to 20 percent. Other economic policies such as deficit reduction are unlikely to change course, providing some business planning stability.

However, beyond the surface, the nature of the electoral results presents two key challenges to the business planning environment for the next five years.

Referendum on EU Membership

A Conservative majority guarantees that the UK will face a referendum on EU membership in 2017. Regardless of the level of impact that a “Brexit” would have on the UK economy, the uncertainty that this issue will cause for business planning will be perilous in itself. Polls show that meaningful re-negotiation of membership terms would prompt voters to prefer staying in the EU. Without a revision of terms, the result of a referendum vote would be a much closer call. One-third of the Conservative members of parliament favors leaving the EU, which will result in enormous pressure on David Cameron to negotiate aggressively with the Union. Given the fatigue associated with the current Greek debt crisis negotiations, Cameron will need to be very careful to balance internal and EU political sensitivities.

The Scotland Challenge

Secondly, despite their parliamentary majority, the Conservatives may still face substantial challenges to their rule, as they hold only one seat in Scotland. Despite Scottish voters’ 2014 rejection of independence, the Scottish National Party (SNP) won 56 of 59 seats in Scotland, taking 40 of 41 Labour seats. The lack of Conservative representation in Scotland casts a legitimate doubt to Westminster’s right to rule there. Although Cameron has already promised to divest more powers to Scotland, mainly around setting income tax, the SNP’s challenge to the conservatives in Parliament will be substantial and likely to cause significant disagreement. For example, the SNP seeks radical reversals of austerity economics, directly opposing Conservative policies.

Takeaways for Business

The Conservatives’ outright majority fends off the uncertainty in the short term, and companies can expect the maintenance of the government’s previous economic policy trajectory. Given the impact of political crisis in the rest of Europe is a welcome development. However, the UK remains divided in its support for the EU, the role of Scotland, and how austerity measures have affected lower-income citizens. Executives should thus ensure that their organizations monitor and remain nimble to political adjustments and the business planning uncertainty that they will bring. 2017 will come sooner than we think.

For a full update on Western Europe, FSG clients can access the WEUR Monthly Market Monitor via the client portal. Not a client? Contact us to learn more.

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