Plenty of challenges for new PM
23 July 2019
The “do or die” Brexiteer will face enormous challenges from the outset as the UK’s new Prime Minister (PM). Azad Zangana, Senior European Economist at Schroders, looks at what his victory might mean.
Boris Johnson has won the Conservative Party leadership contest to succeed Theresa May as PM. The former Foreign Secretary and Mayor of London beat Jeremy Hunt, the current Foreign Secretary by a wide margin: 66% to 34% of the votes.
From the outset, Johnson must navigate a deeply divided party, and a shrinking majority in Parliament. In his campaign, he promised to use a no-deal exit from the EU as a real threat to gain leverage in negotiations. But in doing so he has isolated pro-Europeans in the current Government, many of which will undoubtedly resign, or be replaced.
The biggest name set to step aside is Chancellor Philip Hammond, who could spearhead a rebellion against a no-deal Brexit. In a recent BBC interview, Hammond not only revealed that he would quit in the event of a Johnson victory, but he also refused to rule out backing a vote of no confidence in the Government. Such a vote is very likely to be called by the opposition in the coming days, as it seeks to take advantage of divisions in the Conservative Party.
The Government will probably just about survive this time, but if it looks like it is becoming increasingly likely that a no-deal Brexit is going ahead, then the rebels could win out.
Johnson has said that he will attempt to renegotiate the Withdrawal Agreement, especially the section on the so-called Irish backstop. Europe has held firm on the all aspects of the Withdrawal Agreement, but has hinted that the section on the future relationship could be re-opened.
In any case, we highly doubt that Johnson will succeed in securing any significant changes in the time that he has. Both Parliament and much of Europe are about to break for summer recesses, which will then be followed by party conference season in September. In reality, there are a mere few weeks for Johnson’s team to complete negotiations before the 31 October Brexit deadline.
Parliament will remain in deadlock
While at some level it makes sense for Johnson to use the threat of no-deal as a negotiation strategy, the fatal flaw is that the parliamentary maths has not changed, and does not support the strategy.
The Government has a working majority of just two with the Northern Ireland Democratic Unionist Party (DUP). However, the DUP will not support any deal that would create a divergence in rules/regulations between Northern Ireland and Great Britain. It is clear that there is no majority for the current Withdrawal Agreement, and a significant majority against no-deal. Indeed, we expect those opposed to Brexit to successfully raise motions that would compel the Government to seek an extension in the absence of a deal being approved by Parliament.
Given the low likelihood of a successful re-negotiation, the mostly likely outcome ahead of the Brexit deadline is therefore another delay. Johnson’s “do or die” promise during his campaign simply lacks credibility.
A general election may eventually be called in an attempt to break the deadlock. However, recent opinion polls show a dramatic collapse in support for both the Conservative Party and the Labour Party. The Conservatives, who won about 43% of votes at the 2017 General Election, are now polling on just 24% (taking the last 10 published opinion polls). Meanwhile, the main opposition party has gone from 41% to also just 24%.
A polarisation of views on Brexit has led a large proportion of voters to look for parties with clearer messages on Brexit. The newly formed Brexit Party which is led by Nigel Farage, member of the European Parliament and former leader of the UK Independence Party, is polling on 20%.
Anti-Brexit supporters have decided to shift to the Liberal Democrat Party – the only party to stand for remaining in the EU. The Liberal Democrats have seen their support rise from around 8% in 2017 to 18% in latest polling.
Given near four-way-split in polling, the next Government will probably have to include at least one other major party, and may still not be enough to secure a majority for Brexit.
Fiscal stimulus to follow
While Brexit will continue to be divisive, fiscal expansion will win support more widely. After years of austerity, Johnson is almost certain to follow through on his campaign promise to loosen fiscal policy.
Public spending as a share of GDP is at its lowest level since fiscal year 2003/04. Meanwhile, tax receipts are at their highest level since 1985/86. Tax cuts and some increase in spending are likely, but both will take time to have any meaningful impact on the economy. We will know more when a new Chancellor is appointed.
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