Crystal Ball. Five events or items to look out for in the first six months of 2018

Most of the corporate world resumed work yesterday. Parliament comes back on Monday. It will not be long before the Yuletide celebrations appear a distant memory if recent history is any measure. British politics has been through an abnormally turbulent cycle. The year 2014 saw an unexpectedly tense contest in the referendum on Scottish independence. The year 2015 witnessed a Conservative majority emerge in defiance of the opinion polls. Then, 2016 involved a victory for Leave in the EU referendum which, again, was not what the opinion surveys on the day had anticipated. Last year, of course, was dominated by an election which the Prime Minister had previously dismissed any interest in calling, starting with a huge Conservative lead in the polls (25 points at one early stage), and then crashing in the space of barely a month to an advantage so slender that it ended with the Conservatives blowing the small majority which they had held and being obliged to reach a deal with the Democratic Unionist Party. The law of averages would imply that surely we are entitled to 12 months of relative calm now.
Possibly so. Indeed, in normal political circumstances, probably so. The Brexit process alone, though, makes tranquillity unlikely. Here are five events or items to look out for in the next six months or so.
The size, scope and shape of a Cabinet reshuffle
The first intriguing moment to occur will happen relatively quickly, quite conceivably in days. The enforced resignation of Damian Green as First Secretary of State before Christmas means that a Cabinet reshuffle of some sort is highly probable. A factor reinforcing this is that it is universally anticipated that Patrick McLoughlin will make good his pledge to stand down as the Chairman of the Conservative Party (but not necessarily depart the political stage altogether) at any moment which Theresa May indicates is convenient for her.
The Prime Minister does, however, have to decide between conducting a limited reshuffle, which is focused on replacing one or both of the above with the minimum possible disruption elsewhere, or a much more ambitious exercise which could mean that one or both of the current Chancellor and Foreign Secretary are moved elsewhere or move on.
This is a huge decision. She has the political space to contemplate it because of the agreement about ‘sufficient progress’ struck at the EU Council last month. Before then, any such initiative would have been far too risky. Even today, nonetheless, reshaping the most senior layers of the Cabinet would be an enterprise fraught with danger. Her closest advisers and friends are divided on the matter. Her Chief of Staff, Gavin Barwell, leads a camp which is convinced that she has to stamp her authority on politics and the parliamentary party or risk the air leeking out of her leadership tyres. This same set believes that she should make a speech early this year which elaborates on what she contends the ideal ‘end state’ deal between the UK and EU should be and dare others to oppose it.
There is a second contingent, by contrast, equally loyal to her, which believes this would be reckless. They are urging her to retain the top tier of her administration as it is, make a low-key ‘like for like’ choice to replace Mr Green as First Secretary of State, and stay below the radar on the UK-EU accord for now.
The January and February estimates for Q4 2017 UK economic growth
The performance of the UK economy is always important for short-term political sentiment but that is especially valid in the light of Brexit. Furthermore, this year will also see the first effects of Philip Hammond’s decision to switch the date of the budget from March to November and, he insists, merely issue a written response in March to the Office of Budget Responsibility’s next series of forecasts rather than a full-blown policy reaction. At least for this year that discipline should hold.
What could the OBR state in March that is different from its estimates in November? Experience indicates that it could be more than the normal person might assume in such a short timeframe. The OBR projections at the time of the Budget on 22 November were notably downbeat, much more pessimistic than, for instance, those of the Bank of England or even, subsequently, the OECD.
What it says, and thus what the Chancellor might retort, will be strongly influenced by the most substantial example of economic evidence it receives before then, namely the first and second estimates of Q4 UK economic growth, which will be revealed in late January and then February. If these are at, or even exceed, the 0.4% assessment made for Q3, then the OBR might be inclined not only to upgrade its forecasts for the whole of 2018 slightly but be more rosy about the years after.
This would ease the Chancellor’s position in terms of the politics of the deficit (but, paradoxically, as BVCA Insight has often noted, weaken him in terms of the internal Brexit debate in the Cabinet). An estimate of, say, only 0.2% growth (or worse) would lead the OBR to double down on its depression.
The expiry date in the implementation/transition agreement between the UK and the EU
Although the EU has offered the green light to talks on its future relationship with the UK to begin, the reality is that the first priority for 2018 will be to find a consensus on the implementation or transition period between when the UK leaves the EU (almost certainly on 29 March 2019) and the end state that comes into effect at the end of the implementation/transition interregnum. It is hoped that this can be wrapped up by the end of March, but in the best traditions of the EU a cautious soul would add at least another month to this estimate.
Much of the political and media focus on all this (in so far as it has happened at all) has been on the extent to which the UK will be rendered simply a ‘vassal state’ compelled to accept all EU directives and regulations, including new ones, during this ‘out but still in’ state of affairs. The more important question, actually, is when the transition ends. It has to be consistent with Mrs May’s Florence speech of ‘around two years’ but whether it falls on 31 December 2020, 31 March 2021 or 30 June 2021 means a lot to the ‘end state’ discussions.
The Labour performance in the May local elections
Labour has been on a high since the June 2017 election (despite losing it). There have been few real tests of public opinion since then. The local elections in May are important in that they involve two very different swathes of territory. The first are the London borough contests, where Labour did very well when they were last fought in 2014, a little better still in the Mayor and Assembly ballots in 2016 and even more impressively in the general election. Can they maintain that showing or will the numbers suggest that Jeremy Corbyn has peaked? Many of the other elections in May 2018 are in what was traditional Labour terrain in the north of England where the Labour showing was patchy in 2017. Will the Conservatives still be able to exploit the Brexit factor or can Labour bounce back again?
And, finally, the joker in the pack: will there be any evidence of a Liberal Democrat revival?
Although the Conservative campaign in 2017 was obviously misguided and dire (as was that of the SNP), the real story of the Corbyn surge was the catastrophic Tim Farron-led Liberal Democratic effort. Producing a lower percentage of the national vote than Nick Clegg registered after a brave but always very risky decision to enter government with the Conservatives was extraordinary. There has to be a chance of some kind of Liberal Democrat advance in 2018 with Sir Vince Cable in charge. Will it be of any noteworthy scale? Who will the votes be drawn from? Will it involve any by-election wins in the House of Commons? All of these could prove surprisingly important questions politically. They could change the sense of political mood about the whole of the Westminster battle to come.
Tim Hames
Director General, BVCA