THE STATE OF THE UK NATION –
EU grants three-month Brexit extension as PM seeks election
Johnson defeated on two-thirds vote, but Lib Dem and SNP backing for earlier election has pushed Labour to support one.
Three years after the vote to leave the EU, the prime minister, Boris Johnson, has negotiated a withdrawal agreement and called an election for December 12th to obtain the majority he needs to ratify the deal. Should Mr Johnson win a majority and pass this agreement, there will be a transitional period in 2020 for negotiating the final relationship between the UK and EU, which we expect would need to continue to 2022. Growth remains slow in 2019, and we expect it to remain subdued in 2020.
An unpredictable election
( Why it is important for the Brexit Party to hold the balance of power in or out of Parliament
Another General Election in 2020 is a strong possibility
If Johnson does not get an overall majority or the DUP/ Brexit don’t back him)
Despite getting a deal approved in principle, divisions in this parliament over the final status of the UK made passing a deal unworkable. Unlike those members of the ERG who oppose any regulatory relationship between the UK and EU, many moderate Conservatives and Labour MPs who supported the deal, want to preserve and codify continued regulatory alignment with the EU. As a result, although they agreed in principle to the deal, there was a high probability of this coalition falling apart as the legislation was scrutinised and amended. Mr Johnson instead calculated that he would be better served campaigning on the issue of “getting Brexit done” and working towards a more favourable parliament.
Mr Johnson’s success in unifying his party has given the prime minister a clear message and a 12-point polling lead, which we believe will be sufficient to deliver a large majority that will allow him to pass his bill and secure enough time to negotiate a free-trade agreement. However, he faces significant headwinds, including lingering distrust from the electorate regarding the Conservatives’ domestic agenda, a Brexit party that will seek to punish Mr Johnson for breaking his promise to leave on October 31st and the resurgent Liberal Democrats and Scottish National Party. As a result, even a slight deterioration in the Conservatives’ polling numbers increases the risk of another hung parliament, which in turn increase the risk of a second referendum, or a no-deal Brexit on January 31st.
Conservatives favoured to win election, but uncertainty high
On October 29th the House of Commons (the lower house of parliament) voted to schedule an election for December 12th, the outcome of which will be a critical factor in how the Brexit process will proceed. The Conservatives are currently polling about 10‑12 percentage points higher than the opposition Labour party, and as a result we forecast that they will be the largest party and are more likely than not to command an overall majority. However, this election will be highly volatile, and there are significant risks to our forecast. Additionally, given the fissures within the Conservative Party, the size of this majority will be critical in determining the course of Brexit.
This election will be unusual for several reasons. This will be the first election held in December since 1923. The unusual timing of this election may affect the campaign, as cold weather and voter disengagement in the run-up to Christmas may depress turnout. Additionally, this electorate is also likely to be significantly more fragmented than in previous elections. In addition to the two main parties, the Liberal Democrats are polling at nearly 20% and surpass the Labour party in some polls, and the Brexit Party is still polling between 10‑12%.
Conservatives favoured, but with major risks
Given current polling, the Liberal Democrats and the Scottish National Party (SNP) are both expected to gain seats. The SNP is likely to win back most of the Scottish seats it lost in 2017, including at least ten of the 13 seats currently held by the Conservatives. The Liberal Democrats are likely to gain seats they have historically held in the south of England, as well as strongly Remain seats in south-east England and other affluent metropolitan areas. This means that the Conservatives will have to gain at least 20 seats from Labour in order to reach an overall majority.
With the Remain vote split and Labour support weakened in pro-Brexit seats, we expect the Conservatives to win these seats. However, under the first-past-the-post system used in the UK, the degree of geographic concentration and tactical voting will matter greatly in terms of translating votes to seats, making it difficult to project individual seats accurately. In this context, we believe that the Conservatives will need to maintain a polling average of about 7 points over Labour to be favoured to win an overall majority. Although their lead is currently higher than this, polling can be exceedingly volatile in elections as voters begin to engage with the parties’ platforms. One of the critical issues will be the strength of the Brexit Party, which is currently polling at about 11%. However, this percentage may diminish if Brexit Party voters believe that only a Conservative majority will deliver Brexit, or it may rise if the missed Brexit deadline convinces Brexit Party voters that Boris Johnson, the prime minister, is untrustworthy or ineffectual.
Another risk to our forecast is that, despite this election being called in order to resolve Brexit, other issues could take greater prominence. The Labour Party exceeded expectations in the 2017 election by focusing on criticising the austerity programme implemented by the previous Conservative government. The opposition leader, Jeremy Corbyn, will attempt to focus the campaign on these issues again. The Labour Party’s position on Brexit—renegotiating the withdrawal agreement for a third time and then subjecting it to a referendum—is not popular with Remainers or Leavers, so the Labour Party would benefit if Mr Corbyn succeeds in focusing the campaign on other issues. Mr Johnson has pre-emptively announced a significantly looser fiscal policy than either of his two Conservative predecessors, but this spending has not yet taken place, and so there will be a sizeable contingent of voters who still associate the Conservatives with austerity. The winter election will also take place during a period when the National Health Service (NHS) is likely to be under more severe strain, which may aid Mr Corbyn in highlighting these issues.
What comes next for Brexit – (TROUBLE)
The total number of seats won by the Conservatives will have significant ramifications for Brexit—beyond whether they obtain a majority or not. We see four likely scenarios for the resolution of Brexit, two in which the Conservatives win a majority and two in which they do not. Should the Conservatives win a majority, they will pass the withdrawal agreement—this will be one of their manifesto commitments and the party will unite in support of it. However, the current deal envisages a transition lasting only until the end of 2020, which is an unrealistic timetable for negotiating a comprehensive trade agreement. There is a provision for extension of the transition for up to two years. However, many of the 28 most hard-line Leavers want to leave EU institutions by 2020 and have claimed that Mr Johnson has assured them that this will take place. Therefore, should the Conservatives win more than about 345 seats, we expect them to exit in 2022 after an orderly transition. However, if they win a smaller majority, there is an increased risk of the UK facing a “no-deal” scenario in December 2020, although the exact cutoff point is unclear. Under current polling, we believe that the former is more likely, but even a 2-point deterioration would make the latter scenario more likely.
If the Conservatives win fewer than about 320 seats (this number is subject to change based on how many Sinn Fein members of parliament—MPs, who do not take their seats, are elected in Northern Ireland), this will lead to a hung Parliament. The Conservatives are unlikely to receive the support of the Northern Irish Democratic Unionist Party (DUP), which is likely to retain most of its current ten MPs, although three of its seats are under threat. However, the DUP is not likely to back a coalition led by Labour either. Therefore, should the Conservatives have fewer than about 310 seats, it would be possible for some combination of Labour, the Liberal Democrats, and the Scottish and Welsh Nationalists to form a government. This government would be unstable, but would advocate for a second referendum. However, should the Conservatives win between 310 and 320 seats, and the DUP once again hold the balance of power, it would be unlikely that a government could be formed, and the risk of no deal on January 31st would increase dramatically. Mr Johnson could possibly form a minority government that could pass his deal with the support of Labour defectors, but this would be highly unstable and vulnerable to collapse.
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