23 Mar 2016

Storm before the calm? The PM may have endured his worst month of the EU referendum campaign

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Politics Insight


About a month has passed since David Cameron triggered the EU referendum campaign and there are three months more before the country makes its decision on Thursday 23 June. Right now, the notion that there is still so much longer to endure cannot be making the Prime Minister and his most senior supporters feel especially comfortable.

No one can really claim that the past four weeks have been very appealing ones for the Government and the Conservative Party. The ministerial split over the referendum has not only been more stark but more ill-tempered than anticipated and the link between the fate of the UK within the EU and the succession struggle at the top of the Conservatives has been exposed more publicly than many might have expected. Some 40% of Tory MPs have declared publicly for leaving the European Union.

Added to this, a technically unrelated matter – the balance of the Budget between tax cuts and spending reductions – led to Iain Duncan Smith leaving the Government amidst a distinctly unhelpful debate about whether his decision was secretly part of an attempt to destabilise the Cameron-Osborne axis with the referendum in mind or just reflected the fact that the former Work and Pensions Secretary considers the Chancellor odious.

Having been through all that, the Prime Minister could be forgiven for wanting to spend the next 92 days as a hermit. If matters continued in this fashion then, almost irrespective of the final result of the referendum, the process of restoring order inside his parliamentary ranks and bringing a sense of unity to the Government in the aftermath of this bruising encounter might appear next to impossible. And if the next three months were indeed as poisonous as the past one this would be a very fair analysis. Yet there are reasons to believe that the PM has already endured his worst period of the whole saga.

This is for three factors. The first is that the initial phase of the campaign in which colleagues had to decide on which side they would stand was always and inevitably destined to be the most divisive. It was also the point at which personal ambitions and personal animosities would be openly exposed. That process has now happened. It will not be repeated. There is no one of consequence who is left to declare their hand. The battle-lines are clear. Matters will be more manageable for that.

Secondly, the pace of the referendum is about to ease. The Easter break will be followed by the full and final aspect of the elections in Scotland, Wales, Northern Ireland, London and some other English local authorities that will occur on 5 May. This will offer some alternative politics to the EU referendum. That campaign will then resume at full intensity on 9 May for another six and a half weeks or so.

Finally, the sheer fireworks of the past four weeks has obscured some fundamentals. These are:

Conservative Party is divided but some political obituaries are being written too early

If one were to believe the weekend press then the Government and the Conservative Party is in a state of virtual meltdown. David Cameron is, apparently, ‘certain’ to face a leadership challenge in the aftermath of the referendum irrespective of the actual result. George Osborne has been so badly wounded by recent events that he might well abandon his leadership ambitions. His main rival, Boris Johnson, by contrast can start measuring up the curtains for 10 Downing Street. He had better not move too much furniture in too quickly because other commentators are quite convinced that the convulsions within the Conservative Party will have been so intense that it is all but inevitable that there will have to be another general election well ahead of that which is legally scheduled for 2020.

The appropriate response to this is ‘calm down, dear, it’s only a referendum.’ If the Leave campaign wins on 23 June then in all probability Mr Cameron is finished as Prime Minister. In all of the other eventualities, including a very narrow Remain victory, the ball is in his political court. It takes a formal letter from 15% of the parliamentary party (about 50 MPs) to force a confidence vote in a leader which, if he would to lose it, would result in a fresh election which he could not stand in. This is what happened to Mr Duncan Smith in late 2003 and thus resulted in his downfall.

Mr Cameron is, however, in a far stronger position today than was his ill-fated predecessor then. Furthermore, he has already stated that he will step down before the end of this Parliament. What would be the point in the more mainstream Conservative MP risking the mayhem of deposing him a little early? If Remain prevails by any respectable margin, then any challenge to Mr Cameron would be insane. A kamikaze effort to force a vote of confidence is possible but how many suicidal Tory MPs are there?

Mr Osborne is in a weaker place but some of us have always doubted that he would assume the leadership that easily. But he is not today politically exhausted. It would only take a very modest revision of the economic growth projections upwards (and, let’s face it, the estimates of the OBR have been absolutely all over the place during the past six years) for him to be in a much better position again. It is a wonder what being able to cut taxes can do for your standing with Tory MPs. It is far too soon to write the current Chancellor out of the script of the post-Cameron leadership or simply to assume that if he does not replace Mr Cameron then it must be Mr Johnson who does so.

Finally, an early election requires either two-thirds of MPs to vote for it (meaning both Conservatives and Labour must think a premature contest would be in their interests) or the truly surreal spectacle of a Government voting through a vote of no-confidence in itself in order to bring about an election.

The short-term winner from is Jeremy Corbyn, which is no disaster for the Tories

There is no doubt that the immediate beneficiary of the first month of the referendum episode is the leader of the Labour Party. Media and hence national attention has largely moved away from the incredibly profound divisions within his own parliamentary ranks about his tenure (in so far as one can accurately describe a state of affairs where 85% of MPs do not want their leader in his post to be a ‘division’ rather than a consensus) and the efforts of his supporters to take control of the Labour Party in a root-and-branch manner have similarly lacked intense scrutiny. Labour looks united over the EU, which it is compared with the Conservative Party. The opinion polls which had recently been showing a Conservative lead of 10-12 points have eased back to suggest support is level-pegging.

The consequence of all this is that Labour is now favoured to retake the position of Mayor of London in May and its performance in other English areas. Although it may not be flattering when measured against what it achieved in May 2012 (when the same seats were last contested), it will be acceptable. Scotland will be total carnage and Wales a disappointment but this is largely priced in already. It will be extremely hard for Mr Corbyn’s many opponents at Westminster to argue that they have a case for a coup d’etat against his leadership. This means that he will continue in to 2017 and the longer he can stay there, the more his team can move the party rulebook and organisation in his favour and make it exceptionally difficult to replace him with a moderate before the next election.

In the short term, this Corbyn factor is a severe problem for Mr Cameron in that the absence of a credible alternative Labour leader means the Conservative Party calculates that it can knock the stuffing out of itself over the EU without any risk of losing office as the cost of such indiscipline. For Mr Cameron’s successor, however, the reality that this referendum campaign is likely to entrench Mr Corbyn as Leader of the Opposition and hence as a candidate for Prime Minister in 2020 can only be an unblemished blessing. All of which, those with cooler heads who are either involved in British politics or who secure their living writing about it, should make for contemplation during Easter.

Tim Hames, Director General, BVCA


Sector Insight


The Northern Powerhouse: progress or PR stunt?

The Government has made much of its drive towards the creation of a so-called ‘Northern Powerhouse’, a project that seeks to connect the various cities and communities of the North and in in doing so to integrate the region and foster broader, long-term economic growth. It is an endeavour that rightly deserves praise for its emphasis on rebalancing the national economy away from London and the South East, particularly after years of economic stagnation and income divergence in the regions of the North. But the project does, however, have its critics.

Many businesses fear that it may simply be political rhetoric; a means by which the Government can claim to support the Northern regions whilst implementing considerable cuts to local government grants and services. Moreover, from a political perspective some have argued that the Northern Powerhouse agenda is part of George Osborne’s overall strategy to undercut the Labour Party’s traditional strength in the region and finally rid it of any dependable area of support (this argument has added pertinence since the Scottish National Party’s landslide in the 2015 election). The theory goes that if the Government can be seen to be backing the North through devolution and investment – with any subsequent tangible benefits associated with the Conservative Party – then they in turn will be thanked at the ballot box, thus denying the Labour Party of any chance to form a government for the foreseeable future.

Whilst these claims may contain some elements of plausibility (Osborne is after all often touted as a ‘master strategist’ – recent budgetary stumbles and a Cabinet minister’s resignation aside), one can argue that the Government is now at least beginning to match its rhetoric with concrete proposals and pledges of investment. Indeed, last week’s Budget announcements on regional devolution and infrastructure spending are positive indicators of things to come.

Building connections

The Government’s pledge of £300 million of investment to improve northern transport connectivity and the confirmation that High Speed 3 (HS3) between Leeds and Manchester is to be given the green light are most welcome. As the National Infrastructure Commission (NIC) has argued, policies such as these could reduce journey times to around 30 minutes, which would dramatically improve the environment for businesses and job-seekers alike. By connecting two of the key centres of the nascent Northern economy, better transport links have the potential to integrate unnecessarily isolated economic hubs in the region whilst producing positive spill-over effects, including access to employment, new investment and business opportunities and increased productivity. Osborne’s announcement that the Government will invest around £236 million in transforming and improving road links across the North, such as the M62, A66 and A69, will also have the added benefit of alleviating congestion and providing more efficient means of travel across the region. In addition, the proposed cuts to business rates for all properties in England, with 600,000 small firms paying no rates at all, will be a boon to SMEs and could stimulate further job creation and business growth.

Along with the Government’s efforts to improve transport links and infrastructure, new announcements concerning regional devolution are very encouraging. If the so-called Northern Powerhouse is to enjoy longevity, then increased economic integration and connectivity must of course be accompanied by political devolution and regional oversight. Whilst the Budget’s inclusion of a deal to devolve criminal justice responsibilities for Greater Manchester is by no means related to encouraging innovation and enterprise, it does nevertheless demonstrate a willingness to create real and substantial change in the North by rebalancing legislative duties away from London and into the regions.

More promising still was Osborne’s decision to expand upon Northern Powerhouse agreements and direct similar proposals towards other regions across the UK. A new City Deal was announced for Cardiff with further negotiations planned for Swansea and Edinburgh; new mayoral devolution deals were agreed with the West of England, East Anglia and Greater Lincolnshire; whilst existing arrangements with the Liverpool City Region and Greater Manchester were expanded upon. Without wishing to descend into political cliché territory, it would appear that Osborne, far from seeking only to create a Northern Powerhouse, is actively pursuing a ‘British Powerhouse’ strategy, whereby newly burgeoning economic hubs help to underpin a robust national recovery and industrial revival.

No guarantees

Politically, this is of course very appealing – for the Government and electorate alike – but as venture capital and private equity investors will no doubt be aware from personal experience, such a propitious outcome is far from guaranteed and may take more time and more investment to come to fruition. The backlash following the Budget, including accusations over the use of ‘creative accountancy’ techniques and a warning from the Institute for Fiscal Studies (IFS) that Osborne’s spending plans will require an extra round of austerity during the close of this Parliament, could mean the funding promises that have been made may need to be scaled-back, delayed or cancelled altogether in the coming years. The dramatic change in the public finances from the Spending Review in November to the Budget last week – a total loss of £29 billion when comparing the Office for Budget Responsibility’s (OBR) forecasts for the two periods – is a clear and worrying indicator of how rapidly economic conditions can change for the worse, in turn impacting Government proposals and promises of investment.

That all being said, and in spite of the Government’s efforts, private equity and venture capital investors have already been at the forefront of enterprise, innovation and broader economic growth in the North. The BVCA itself co-sponsored the RSA City Growth Commission, chaired by the now Commercial Secretary to the Treasury Lord O’Neill, and supported Lord Adonis’ call for a National Infrastructure Commission from 2014.

On the ground private equity investors have funded over a third of all deals in the manufacturing sector in Yorkshire last year, with the northern private equity market as a whole the most active in the UK outside of London and the South East. Indeed, figures from Imperial College London’s Centre for Management Buy-out Research reveal that 31 deals worth £1.9 billion were completed in 2015 alone. The potential for further investment activity and business growth cannot be overstated. Given that the North’s economic output, by gross value added (GVA), was an estimated £304 billion in 2014 – which would make the region the 10th largest economy in the EU were it a country – there is undoubtedly immense potential for future growth.

Private equity firms have taken great strides in upscaling mid-market businesses, whilst venture capitalists have enabled entrepreneurs and start-ups across the North to turn their ideas into commercial realities. If the Northern Powerhouse project too becomes a reality, interconnected by modern and efficient transport links and underpinned by a pro-business and pro-enterprise political environment, then opportunities for future investment and stronger returns will surely follow. The hope then is that this is indeed a concrete economic and political framework, and not as some sceptics argue, an imaginative PR stunt intended to undermine the Opposition and entrench the Conservatives’ political dominance in Westminster and the country.


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