A Route to Re-Election?

The Conservatives are underpriced, and a Labour victory at the next election is not set in stone, despite what many had seen in recent years and an insurmountable lead in the polls. According to Stonehaven's latest polling and analysis, the Government has turned a corner on two years of decline, but the pathway to victory remains narrow. A gloomy economic outlook offers little room for manoeuvre and most voters are unconvinced that the Budget will make a positive difference.

In this note, we explore what the polls and economic forecasts are telling us about the next election, how Labour should respond against an increasingly confident Conservative Party, and what all this means for businesses.

Key Takeaways

1. The Conservatives are underpriced, and a Labour victory at the next election is not set in stone. While Labour remain the clear favourites, a very narrow pathway to a Conservative victory is now emerging. Businesses should not put all their eggs in one basket and focus their engagement efforts entirely on the Labour party at the expense of the Conservatives. As the polls begin to narrow, the possibility of a minority government is rising, making both the SNP and Liberal Democrats potential powerbrokers, not to be overlooked in business outreach and manifesto drafting.
2. While the polls are moving in the right direction for the Government, it has incredibly limited room for manoeuvre – both politically and economically – and there is a lot of scope for things to go wrong. Our research shows that support for the Budget is shallow, particularly among swing voters. To have a hope of continuing with their current momentum, Sunak and his Cabinet will need to stay focused on delivery across a small set of priority areas, avoid scandal and further Party factionalism, and enjoy a healthy dose of luck when it comes to global factors.
3. Meanwhile, Labour can no longer sit on their hands and watch the Conservatives implode. A real fight is now on for the centre ground. To win it, Labour will need to better explain their policy vision to voters. In doing so, they need to find a clear, Labour-centric narrative that sits behind their policy agenda, or risk seeing their more popular policies stolen by the Government. Looking ahead to 2024, Labour will also be held back by an economic outlook that will prevent expensive promises from a Party looking to prove itself as fiscally responsible.
4. Businesses need to reflect these constraints in their dealings with both the Government and Labour. They should increase the focus on regulatory changes that will facilitate economic growth – the number one priority for both sides of the political spectrum. Both Labour and Conservatives are in listening mode and looking to fill manifestos this year.

The Conservatives are underpriced

According to Stonehaven’s recent polling and analysis, the Government has turned a corner on two years of decline (Figure 1). This follows a period not only of relative calm for the Government, but of perceived success on the Windsor Framework, a deal with France to tackle illegal immigration, and better-than-expected economic news (though on this, the picture is mixed). The Government also has further plans to “deliver” on issues ahead of the next set of local elections in early May.

But the shift in the polls is not simply driven by a random series of convenient events or one-off successes for the Government. The Prime Minister and his top team of ministers have correctly mapped (see Figure 2 below) their battlefields according to the issues that matter most to the British public. Boiled down, these are the economy and cost-of-living crisis, the NHS, and illegal immigration. It is not by accident that this trio respectively make up points 1-3, 4, and 5 of Sunak’s “five priorities” outlined at the start of the year.

Drawing, not for the first time, on the David Cameron and George Osborne playbook, Sunak hopes that a focus on these issues can convince the public he is delivering on their priorities. In the same vein as “long-term economic plan”, expect targeted slogans like “stop the boats” and “Budget for growth” to continue as Sunak looks to embed this message.

Figure 2: Top ten voter priorities

This strategy is paying dividends, beyond simply the polling. As shown in Figure 3, for the first time since early 2021, a growing number of the public believe the UK is heading back on track – though still far south of 50%. Conservative strategists now see a plausible pathway to victory in 2024, envisioning a scenario where illegal immigration is falling, NHS waiting lists are coming down, and the economy is growing – and with it - public confidence. They are banking on the public forgetting or forgiving the chaos of 2022 if they see that the things they care about are improving, even if living standards remain below their pre-pandemic peak (more on that below).

Figure 3: Public perception on direction of the UK

To this end, expect policy over the next year to be squarely focused towards these three areas. Hence the Budget’s focus on growth via investment incentives and expanding the workforce, and the recent focus on tackling illegal immigration. Ministers will be hoping that NHS waiting lists will come down naturally as we get further from the pandemic – aided by a strike-ending deal on pay and incentives for senior doctors to stay in work. In dealing with Government, businesses should focus in particular on the growth objective, showing how their policy proposals will support economic growth – and fast.

Sunak and his top team have undoubtedly hit their stride and we are seeing the first signs of a turn in fortunes for the Conservatives. He has (for now at least) settled a party that was fractured and chaotic mere months ago – with his predecessors side-lined and the rebellious ERG cowed.

Conservative special advisers are united in the belief that the “large mountain must be traversed in stages, get to the next base camp then go again as we head towards a summit bid”. A route to victory is emerging, but, with deep ravines on either side of this mountain path, there is little room to manoeuvre and even less for error.

The path to victory is narrow

A deeper look at the data presents a much less rosy picture for the Government. While the perception among UK voters of the recent Budget is broadly positive – 29% think it is a step in the right direction versus 24% who think the opposite – a significant proportion, 41% believe it will neither help nor hinder. Zooming in to look at swing voters – those who the Government particularly needs to persuade – looks even worse. Only 21% believe the Budget will help the UK, against 30% who think it will hurt it.

Figure 4: Public perceptions of Budget impact

Furthermore, as demonstrated in Figure 5, even if inflation decreases considerably this year as forecast, only a small proportion of the public will thank the Government for it. Less than a fifth say it would make them more likely to vote Conservative, though this rises to a more substantial 32% for swing voters.

Figure 5: Inflation’s impact on voters’ likelihood of opting for the Conservatives

Admittedly, asking voters now how they will feel in a year’s time comes with a health warning. The mood could be substantially different by the second half of 2024, especially in the context of falling levels of inflation. But looking beyond the polling, the economic forecasts also make grim reading for Conservative supporters.

Figure 6 shows that Sunak is set to meet his target to halve inflation by the end of the year (CPI is projected to be 2.9% for Q4 2023). This is driven by food and energy bills no longer getting more expensive, but neither do they get cheaper. Falling inflation does not alleviate the cost-of-living crisis; it merely stops it getting worse. This is not the beginning of the end, but the end of the beginning. Voters are unlikely to reward Sunak for meeting his political targets if they don’t feel better off.

Figure 6: Drivers of inflation, historic and projected

In fact, disposable income per person is projected to be £1,500 lower this year than pre-pandemic, and isn’t expected to recover until late in the decade (Figure 7). This projection is driven by wages catching up with past price increases rather than falling prices. There is a real risk that inflation adjusted wages do not recover to pre-pandemic levels this decade.

Figure 7: Real household disposable income per person

The question then turns to voter memories. If living standards are beginning to increase, will voters judge how well off they feel against the pre-pandemic peak, or a year previously? That question will almost certainly become the critical framing for both main parties in the 2024 election. For Labour, simply “do you feel better off than 2019?”. For Conservatives, “is Britain heading in the right direction?”.

But for the Conservatives to have any success in the latter approach, an awful lot will need to go right. The Budget leaves a fiscal headroom of only £6.5bn to meet the Chancellor’s rules (that debt must be falling as a proportion of GDP by the end of the five-year period). That is the smallest headroom of any Chancellor since the rules were introduced, so there is miniscule room for additional spending. Meanwhile, the tax burden is already the highest in history, with intake expected to hit a trillion pounds by 2026, leaving little scope for additional rises.

That leaves a lot of scope for things to go wrong. Financial uncertainty following the collapse of SVB and merger of UBS and Credit Suisse could grow, damaging investment-led growth and tax receipts. The Ukraine war shows no signs of ending soon and rising tensions with China could hurt international trade and supply chains gravely.

Closer to home, the Conservative Party, while seemingly more united now than in over a year, has shown often over the previous decade how quickly it can revert into factional infighting. But the Party is known for re-inventing itself in Government ahead of elections, and 2019 proved how even a fractured Party could come together at the last minute and become a potent electoral force.

What does this mean for Labour?

Labour’s “Ming Vase” strategy has, until now, been reliant on a failing Government and a stalling economy. Yet Sunak’s quiet competence is putting the Opposition in danger of complacency. Keir Starmer and his strategists are also working with a narrowing political space. They will need to define themselves against a more effective Conservative Government hungry to reclaim the centre ground. In that battle, Labour will feel confident that their thinking is popular – GB Energy, capping energy bills, increased free childcare have all gone down well, with the last two adopted by the Government. Expect Labour’s frontbench to continue arguing that their long-term plans for reform will make people better off than short- term Tory fixes, diminishing the Government’s recent successes in light of the last 13 years.

There are more rabbits yet to be drawn from the hat before the next election, however Labour will have to walk a tightrope. Revealing good policies early may see them stolen by the Conservatives, but delaying risks fuelling a narrative that the Party has no ideas. Labour urgently needs to tie its policy proposals into a unified vision inseparable from their new brand. This will make individual policies harder to steal while also helping the public to understand how a Labour Government might affect their lives. Expect the Party to use its Conference this year to build such a platform with a raft of policy announcements.

However, budget constraints put the Party in a tight spot as they seek to unveil eye-catching policies. Public debt is projected to reach 95% of GDP, well up from the pre-financial crisis levels of 36% (blue line in Figure 8). High debt means increases in interest rates have pushed up interest payments (red line), constraining any government’s ability to fund new policies. The next government will inherit a tricky situation: Hunt’s spending plans have interest payments exceeding net borrowing (gold line) by 2026/27, meaning tax receipts will need to cover some of this interest shortfall, limiting day-to-day policy spending. Hunt may not intend to keep these plans post-election but, with an eye to proving fiscal responsibility, Shadow Chancellor Rachel Reeves cannot commit to further spending without increasing taxes.

Figure 8: Public debt, deficit, and interest payments as a percentage of GDP. Interest payments and net borrowing are shown on the left axis; debt on the right axis.

Labour don’t need to rush – the onus is still on the Conservatives to claw their way back in the polls. Labour will be keen to show that Sunak’s “five priorities” don’t equate to delivery, and that any progress will simply mitigate but not reverse the current situation. But the Party still has some way to go in setting out a policy vision of its own that cuts through with the public. As the Conservatives become more credible, “what do you stand for” will become an increasingly important question for Labour to answer. If it cannot, and if there is improvement to the voter priorities outlined above, then the public will more likely opt for what they know.

How should businesses respond?

Engage widely: clients should continue to prepare for a Labour Government, but the Conservatives should not be written off. Businesses who put it all on Labour risk being caught by surprise in 2024. Meanwhile a Government that is now focused on delivery, rather than dealing with internal squabbles, should remain a crucial target for engagement. Both Parties are writing their manifestos this year, creating an opportunity for businesses to shape policy in the next Parliament and avoid playing catch up post-election. 2023 will be the big year for policy ideas, while the focus of 2024 will be politics and electioneering. Businesses should get ideas in quickly.

Really widely: if the polls continue to tighten, the possibility of a minority Labour government propped up by the Lib Dems, Plaid Cymru or SNP (likely in a “confidence and supply” arrangement, rather than a formal coalition) will rise dramatically. The Lib Dems are running a tight operation that is already producing dividends, targeting ‘Blue Wall’ Conservative seats. With the Party aiming for 25-30 seats in 2024, they could have a real impact on the next government. Such an agreement would likely, as in 2010, be framed as being a matter of national interest to tackle the country’s economic woes. Businesses should ensure they are engaging beyond the two main Parties as the election approaches. Should the polls tighten further, Stonehaven will produce a note looking at this outcome and what it means for clients in more detail.

The Government is listening: more so than any time since 2019, the Government has the will and the bandwidth to engage with businesses. The Budget accepted Sir Patrick Vallance’s recommendations on regulation of emerging digital technologies and life sciences, and ministers have now asked Professor Dame Angela McLean to look into regulators more widely, feeding into the Department of Business and Trade’s consultation on this subject later this year. Both will create opportunities for engagement and policy changes.

Growth, growth, growth: the Government desperately needs to show delivery against its priorities ahead of the next election, chief among them facilitating a growing economy. Businesses that can show ministers how their plans or policy proposals will contribute to economic growth – and, crucially, do so quickly – will be pushing at an open door.

All about that reg: businesses should favour a regulatory wish list over an investment-based one. Put simply, there is no money left in the Chancellor’s briefcase for additional spending commitments. This message will be filtered through across Whitehall, meaning that even small pots of money and procurement requests will become significantly more challenging.

 

References

Figure 1: Stonehaven analysis – monthly surveys averaged across quarters, each fielded to a UK nationally representative audience of sample size = 2,000

Figure 2: Stonehaven analysis – survey fielded to a UK nationally representative audience of sample size = 2000. Fielded between 18 and 20 March 2023.

Figure 3: Stonehaven analysis – monthly surveys averaged across quarters, each fielded to a UK nationally representative audience of sample size = 2,000

Figure 4: Stonehaven analysis – survey fielded to a UK nationally representative audience of sample size = 2000. Fielded between 18 and 20 March 2023.

Figure 5: Stonehaven analysis – survey fielded to a UK nationally representative audience of sample size = 2000. Fielded between 18 and 20 March 2023.

Figure 6: OBR (2023), table 2.3, ‘Economic and fiscal outlook’, https://obr.uk/efo/economic-and-fiscal-outlook-march-2023/

Figure 7: OBR (2023), table 2.17, ‘Economic and fiscal outlook’, https://obr.uk/efo/economic-and-fiscal-outlook-march-2023/

Figure 8: OBR (2023), tables 4.10, 4.11 and 4.15, ‘Economic and fiscal outlook’, https://obr.uk/efo/economic-and-fiscal-outlook- march-2023/

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