On 7 May the nation faces one of the most unpredictable elections in recent history and one with high stakes given the issues on the table, including a potential EU exit, the break-up of the UK, big decisions on austerity and public finances and fundamental electoral reform.
The profession – like the City, like the electorate – largely doesn’t know what to make of it. But that doesn’t mean we won’t be wrestling with the implications of the 30-year journey of the UK from dual-party elective dictatorship to multi-party horse-trading and a series of disruptions to the UK’s constitutional arrangements since the early 1990s – disruptions that have often had unintended consequences.
Judged on its record overall the coalition government did pretty well. The government, of course, inherited a fiscal mess – one more linked to the banking crisis than obvious mis-steps by Labour beyond the light-touch financial regulation that the Conservatives also supported – but it stuck the course with enough flexibility when needed and got the mood music right.
There were setbacks, obviously, including a cack-handed attempt to reform the NHS early in the Parliament and I’ll go to my grave believing the argument for university tuition fees over a graduate tax was a bad call. You also don’t have to be a bleeding heart to think the stewardship of the Ministry of Justice was just poor but they got a lot of the big stuff right on the economy and enterprise.
That an administration successful by post-War standards with a strongly recovering economy and low unemployment hasn’t got this election in the bag speaks to both the unprecedented nature of this contest and ongoing presentational difficulties of the Conservatives. Why the party can’t get its head around the need for a one-nation 2.0 update of its image remains a mystery. A fair number of City lawyers, along with the business lobby, want the closest substitute, another Con/Lib coalition with an EU referendum ruled out, but the UK hasn’t become comfortable enough yet with multi-party government for them to run on a joint ticket.
Housing and the demographic challenges facing welfare – the two long-term issues that UK governments have ducked for decades – don’t get serious address in the manifestos, despite a number of flashy housing announcements that probably won’t be met by whoever wins. So bad have become the problems of over-priced London real estate, it’s not unusual now to hear managing partners fret about the long commute and poor housing of mid-level associates or even junior partners, which says it all.
Using the basis of the Institute for Fiscal Studies’ (IFS) assessment of the main parties’ manifestos, all three are aiming for substantial further curbs in borrowing (currently running at about 5% of national income after peaking at just over 10% in 2009-10).
The Conservatives are aiming for a considerably greater spending contraction, eliminating the deficit entirely by 2018-19, but have put forward policies that marginally reduce the current tax take. As such the IFS concludes they have questions to answer in how they will achieve an effective 17.9% cut in departmental budgets’ outside protected areas like health over four years, a very considerable challenge as these departments have already seen a 18.1% reduction between 2010-11 and 2014-15, eliminating many of the ‘easy’ cuts. (Law, of course, having already been hard hit in the Parliament would once more be in the firing line).
Labour’s fiscal plans are looser, though more achievable. On the IFS analysis, they would cut borrowing by 3.6% of national income by 2018-19. The Conservatives would reduce debt from 80% of national income currently to 72% by 2019-20, Labour plans imply national debt falling to 77% at the same point, meaning an additional £90bn in borrowing. In essence, the Conservatives have more to please fiscal hawks, but a lot of questions on the feasibility, desirability and economic impact of delivering this level of cuts, especially given the generous line on retirement benefits, while Labour pledges to continue austerity, arguably in a more deliverable manner but with issues over the commitment to address long-term sustainability of public finances.
Putting aside party loyalties, wading through the manifestos and policy commitments, with one glaring exception, it appears that the Conservatives have the strongest overall economic plan. (I say that as a non-Conservative voter.)
Labour goes into the election with rhetoric that although isn’t entirely anti-business, at least doesn’t tip the cap to the City as much as it’s used to, and three highly symbolic policies: the introduction of a mansion tax, a 50% income tax rate and abolition of the non-dom regime. Personally, I’d argue the economic rationale for pushing through all three together looks shaky in terms of tax receipts and encouraging investment – a mansion tax plus a considerably tightened up non-dom regime would have been a better balance – but given the squeeze on living standards, it’s not a surprising approach. Still, if Labour looks less assured and polished than in recent years, it’s a more pragmatic programme for government than you might think.
By the way – a partner on £1m would pay about £43,500 more in annual income tax and NI under Labour’s pledges than the Conservatives; one struggling by on £500,000 a year, would have to stump up an extra £18,509.
But quibbling over non-doms is small beer when it comes to the uncertainty of EU withdrawal. The referendum pledge strikes me as a bizarre policy. You can make a decent case that the UK never should have gone in but it did and has been building its economy around the EU for 40 years. Having sat out the single currency and with some sizeable other policy carve-outs – it looks a pretty good deal.
You can imagine a scenario where the UK does fine outside the EU, the sky doesn’t fall, extra flexibility counters the draw-backs and the economy adapts – but I can’t see a huge upside, just the absence of disaster. On the other hand, you most definitely can see a lot of hard-to-predict things going very, very wrong in an EU exit, particularly given London’s position as Europe’s dominant finance and professional services hub and half our exports going to the region. Unless you hear trumpets when you think about an EU exit, the risk/reward doesn’t stack up and the Scots referendum hardly put that issue to bed.
This is particularly resonant for City law firms. The EU contributed to the global rise of the UK profession, forcing through mutual recognition of qualifications, bolstering London and triggering a wave of region-wide consolidation. It’s true that City firms are materially less Euro-centric than 15 years ago as their investments have increasingly focused on emerging economies and they have struggled to operate profitably in the Continent, but the legal industry has been one example of how British business can get a lot out of Brussels. Still, at least top UK firms have an exit hedge now – they certainly paid enough getting it.
But then such lurching policy-making could become a lot more common as multi-party politics kicks in. We may all live in an anti-political age. We may ultimately come to regret it.
Subscribers can click here to read: ‘Fault lines’ – our assessment of the key election polices facing the City and profession