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November 24, 2020

Europe

UK: The electoral politics behind the fiscal debate

BY Carsten Nickel

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( 5 mins)
  • Ahead of the chancellor’s 25 November spending review, the UK’s future fiscal and economic trajectory is again in the spotlight.
  • The departure of Brexit mastermind Dominic Cummings from Downing Street has, in many quarters, fueled hopes for a quick return to the more benign (for businesses and urban middle classes) conservatism of the Cameron years.
  • However, the Tories remain structurally split between calls for greater investment and instincts of fiscal moderation; this rift will not be overcome any time soon.

Calls for greater predictability over the longer-term will likely be disappointed. Electoral politics means that the underlying tensions are unlikely to get resolved in one direction or the other soon. The likely result is a factual but unspoken acceptance of higher debt levels for now. This will be driven by an ongoing flurry of piecemeal spending initiatives, occasionally interjected with pushes for fiscal restraint and tax hikes, as already discussed in the summer and, yet again, in the run-up to this spending review. Indeed, this week’s short-term review will hardly be a comprehensive exercise after the government ditched the initially planned three-year evaluation.

At the core of the underlying electoral politics are questions about the changing political preference of middle-class voters. A traditional take on voter coalitions in the majoritarian electoral system holds that – at least since the Thatcher years and continued under Blair – large swathes of the middle-classes tend to side with higher-income voters to limit taxation. But voting patterns have been in flux for a while now, not so much caused by, but rather as expressed in, Brexit. For one, today’s Conservatives have gone far beyond what Thatcher achieved when she increased the Tory vote at the lower end of the middle-class electorate; in the December 2019 election, Johnson’s Tories famously won several of the former Labour-voting, working-class constituencies far from London.

Spendthrift middle classes?

At the same time, however, there are growing questions over the policy, spending, and taxation preferences in the more prosperous parts of the middle-class and perhaps even in parts of the higher-income electorate. Across rich democracies, there is reason to assume that younger and better-educated voters might increasingly prefer greater state involvement in the provision of public services and investment to help with everything from tackling climate change to preparing children for the new “knowledge economy.” This new middle-class vote might be less opposed to greater spending and taxation, as long as the money is not being “wasted” on short-term benefits but invested in projects that promise to be efficient over the longer term.

Johnson’s green deal offer, for instance, should be seen in this context. The PM committed to a net-zero emissions target by 2050 and vowed to ban the sale of new combustion-engine cars by 2030. That puts him in line with governments across Europe, hoping to leverage green investment policies to create a new growth model that is ideally also more socially inclusive than the last four decades of globalization. But a key aspect that has immediately been noted about Johnson’s green offering is that it contains merely GBP 3bn in new money. This is because the PM is walking the tightrope between three broad voter groups: the green-urban-liberal voters he managed to reach in his days as mayor of London; lower-income voters who require investment for the green transition to create new growth and employment opportunities in the short term (or whose losses will at least need to be mitigated); and the traditional, economically liberal and higher-income brackets of the Tory electorate skeptical of greater spending. Recall that, unlike in a proportional electoral system, large parts of these diverging groups need to be brought together under the umbrellas of mainly two political parties in the UK.

Labour challenges?

As if this was not difficult enough a situation, the element of electoral competition further complicates things. As long as Sir Keir Starmer leads the opposition with his credentials of pragmatism and integrity, Labour might have higher chances again than under Jeremy Corbyn to win a share of the better-educated, socially liberal middle-class vote. But what it lacks for a potentially winning voter coalition is the reconsolidation of its previous working-class electorate. If only for tactical reasons, in turn, the Tories will find it hard to fulfill commentators’ hopes and use the Cummings departure to swiftly drop their new working-class electorate, leaving it for Labour to reconnect with it. A Labour offering that convinces socially liberal (new) middle-class voters of the need for targeted spending to win over greater parts of the lower-income vote for, say, fighting climate change could pose a serious challenge for the Tories.

This is the political backdrop for this week’s spending review. Chancellor Rishi Sunak’s ideas for continued pandemic support now, followed by tax hikes directed at higher-income brackets later (lowering pension tax relief, raising capital gains tax), is a fiscally more responsible version of Johnson’s attempt to walk the tightrope. Sunak has tried to protect lower-income voters, first with his unprecedented furlough scheme in spring, and now with plans for spreading the pain of eventual adjustment. But ultimately, his bet is that support for fiscal moderation will prevail among middle-class voters over the medium term. The biggest threat to this is a scenario where limited economic expansion due to a prolonged post-pandemic crisis, painful adjustment, and changing fiscal preferences in the new middle classes create momentum for Starmer closer to 2024. Against this risky backdrop, the conversation around fiscal and economic policy will remain volatile rather than providing the much-desired, greater clarity of the old days of British politics.

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