Scenario 2: Labour wins a relative majority in a fluid – ‘floating’ Parliament
In such a result, Labor becomes the largest party in Parliament, but fails to secure the 326 seats required for an absolute majority, forcing them to either negotiate a coalition deal with a smaller party, or attempt to form a government. “minority with trust” and of course a “supply agreement” with one or more other contracting parties. Potential coalition partners for Labor include the centrist Lib Dems, the centre-left Scottish National Party (SNP) and the Greens, each of whom will extract political concessions in return for their support (either formally as members of a government coalition, or indirectly as a supporter in Parliament of a Labor minority government). In this scenario, Labor’s political agenda focuses on strengthening public services and social welfare programs, promoting the country’s energy transition and promoting closer relations with the European Union, i.e. all those elements with which it will align in pretty much any potential coalition partner.
Given the economic and fiscal constraints, the increase in public spending will be financed through higher taxes on top earners and large corporations. The need to negotiate with coalition partners would still lead to compromises on key policies. For example, the Lib Dems might push for electoral reforms and a bolder approach to the European Union, while the SNP and the Greens might respectively push for greater Scottish autonomy and more aggressive climate action. The legislative process can face deadlocks, due to the different interests of the coalition partners and the constant “dealing” of benefits, so in turn it can increase political uncertainty, hinder decision-making and increase the chances of an early collapse of the government.
Implications of this development
■ A “fluid” and unstable parliament forces Labor to negotiate with potential coalition partners, leading to policy compromises and a more fragmented legislative process. The delays in decision-making and the greater uncertainty of the politicians, create the risk of premature collapse of the government.
■ Coalition negotiations may lead to more substantial spending increases to meet potential demands from partners, thus limiting the fiscal space for Labour’s plans to strengthen public services and welfare programmes. This increases the likelihood that the government will raise taxes on top earners and large corporations to finance increased public spending.
■ Perceptions of increased political instability under a coalition or minority government could damage US investor confidence in the UK, potentially with investment in the country remaining relatively low compared to its European counterparts. USA in EU countries.
■ The UK Government is focusing on simplifying the planning system for new housing and public infrastructure, with the aim of reducing bureaucratic delays and speeding up key projects. However, negotiations within a coalition may affect the scale and scope of these initiatives.
■ A coalition between Labor and the Lib Dems will seek to implement stronger trade union rights, higher minimum wages and better protections for workers in the casual economy, raising operating costs for service companies as well as ride-hailing companies and distribution.
■ While the Lib Dems support greater regulation and some level of public ownership, the party is less inclined to large-scale nationalization compared to Labour, which advocates greater public ownership of utilities and key industries. So in any coalition government with the Lib Dems, Labor could be forced to significantly water down its plans to increase public investment in industry and infrastructure, as well as its push to nationalize the UK rail network. A coalition government between Labor and the Lib Dems would likely agree to significant increases in public spending to strengthen public services such as the NHS, education and infrastructure, while maintaining a commitment to long-term fiscal sustainability – reflecting the Labour’s commitment to maintaining fiscal discipline and the Lib Dems’ focus on balancing the budget. This means that any spending increases will be largely offset by cuts elsewhere, as well as targeted tax increases.
■ If economic growth stagnates and the UK government finds itself in need of more revenue, a coalition between Labor and the Lib Dems will likely result in raising taxes on the rich and big corporations, including higher rates of income tax for the ” seniors’, but also the reform of the capital gains tax, together with a ‘mansion tax’. A special tax increase can also be adopted to fund the NHS.
■ A coalition between Labor and the Lib Dems would have a stronger pro-European stance than a Labor-only government. While Labor will seek incremental progress on trade and regulatory co-operation, the Lib Dems are likely to push for even closer regulatory alignment with the European Union and further integration in trade, cross-border movement and other areas.
■ If the party begins to lose support as a junior coalition partner with Labour, the Lib Dems may even push for a second Brexit referendum or a vote seeking the British public’s mandate for significantly closer ties with EU, depending on the evolution of the attitude of the British public towards the European Union.
■ In a coalition with Labour, the Lib Dems will push for electoral reform to move away from the UK’s traditional post-first past and towards proportional representation, which could significantly change the political landscape and governance structure of the country in the future. Labor is unlikely to agree to such a reform, given that it benefits from the current electoral system. But the party could be forced to agree to hold another referendum on electoral reform, even though UK voters rejected the Lib Dems’ referendum on the issue in 2011.
■ A coalition between Labor and the Lib Dems could lead to more extended timetables for key climate targets such as the full decarbonisation of the UK electricity sector. This is because the Lib Dems support a more gradual approach to moving away from fossil fuels than the Labor Party.
■ Conversely, a coalition government between Labor and the Greens would raise the possibility of more ‘aggressive’ climate action, potentially leading to tighter environmental regulations and accelerated renewable energy targets. The government will also stop issuing new oil and gas licenses for the North Sea, favor renewable energy investment over nuclear power projects and seek to link the country’s emissions trading system to the European Union’s creation of a single carbon price.
■ In return for agreeing to form a coalition with Labour, the Scottish National Party (SNP) will likely demand greater Scottish autonomy, leading to increased devolution in Scotland and greater economic opportunities for the area.
■ A possible deal with the SNP could also include a concession by Labor to hold another referendum on Scottish independence, particularly if polls show it is likely to result in a vote for Scotland to remain in the UK.
Scenario 3: The Conservatives win a relative majority in a fluid – “floating” Parliament
In this result, the Conservative Party loses its majority, but remains the largest party in the House of Commons. To govern, the party would have two options: The first would be to form a minority government, likely to be supported in Parliament by the right-wing Democratic Unionist Party (DUP) of Northern Ireland and eventually by members of parliament elected under the right-wing Reform UK party. The viability of this option will depend to a large extent on how “short” the Tories are in their majority, as well as how many seats the DUP and Reform UK will gain (as of course how many of these will be gained at the expense of of the Conservative Party itself), an element that would determine whether a pact with them is mathematically viable.
The second option would be to seek informal support in Parliament from the Liberal Democrats. While this outcome is possible if current Prime Minister Rishi Sunak retains the leadership of the Conservative Party and keeps the party on its current centrist trajectory, the Conservatives’ low popularity means the Lib Dems would be very leery of working with the party.
Any version of a Conservative minority government would likely seek to build majorities on an ad-hoc basis amid a lack of official support, accepting that the proposed legislation would end up being heavily amended or even defeated in Parliament. In this context, the new government will face challenges when passing the bills, leading to policy uncertainty, especially in particularly sensitive areas such as the economy, fiscal policy and relations with the European Union.
Furthermore, given the deep internal divisions within the Conservative Party itself, any attempt to work with other parties, whether on the left or the right end of the political spectrum, is likely to guarantee internal friction and rebellion, further destabilizing the minority government. Ultimately, the political turmoil that would result from any scenario in which the Conservatives form a minority government could also cause some economic instability in the UK, ultimately resulting in a government collapse and an early election just months after the vote.
Implications of this development
■ The Conservative Party is likely to keep its previous promise to increase military spending to 2.5% of GDP by 2030, although growing financial and economic constraints are likely to force the government to delay the necessary actions to achieve this goal.
■ Strained relations with the European Union and some of the UK’s key European allies are pushing the country closer to the United States, especially if Trump is re-elected. This means London will align more closely with Washington’s China policy, possibly leading to more restrictions on UK exports and investment in Beijing.
■ The government faces challenges in enacting legislation, which understandably leads to policy uncertainty. Frequent negotiations and compromises to create ad hoc majorities slow down decision-making processes and potentially result in weakened policies.
■ Political instability is likely to trigger turmoil in financial markets, potentially undermining investor confidence and leading to a sell-off in UK financial assets, along with currency and stock market volatility.
■ The minority government struggles to implement a coherent fiscal policy, potentially creating a variety of fiscal challenges, such as delays or compromises. This, in turn, leads to inconsistent or fragmented fiscal policies that are ultimately less effective, while at the same time complicating efforts to reduce the deficit.
■ The Conservative Party potentially implements promised tax cuts, such as a cut in inheritance tax or further cuts to National Insurance contributions. It is obvious that this will likely produce a budget deficit, subsequently requiring spending cuts and austerity measures to maintain some fiscal discipline and to reduce potential market turmoil.
■ Potential financial instability under a minority Conservative government could lead to further delays or cuts in funding for public services, immediately affecting areas such as health care, education and social care. Continued uncertainty may also hinder long-term planning and investment in vital infrastructure projects.
■ Cuts in public spending are likely to trigger protests and strikes by labor unions, leading to disruptions in transport, business and public services.
■ The need to co-operate with other parties is likely to exacerbate internal divisions within the Conservative Party, sparking intra-party rebellions and potential leadership challenges, thus further destabilizing the UK government and economy.
■ The minority government struggles to maintain a consistent foreign policy, particularly in sensitive areas such as relations with the European Union. Any attempts by the Conservatives to negotiate new deals or align with EU standards could face significant opposition from within the coalition, complicating efforts to maintain positive relations with the European bloc.
■ In the case of a Conservative coalition with the DUP and Reform UK, the government would be under pressure to take a tougher stance on anything related to the country’s relationship with the European Union. The DUP will likely challenge the scrapping or renegotiation of the Northern Ireland Protocol of the post-Brexit deal, which would significantly escalate tensions with the European Union and possibly guarantee a trade war.
■ In the case of a Conservative coalition with the DUP and Reform UK, the resumption (or challenge) of post-Brexit negotiations on trade-defining arrangements is likely to reignite tensions in Northern Ireland, potentially leading to unrest and clashes between unionists and Irish Democrats.
■ UK reform would likely require tougher anti-immigration policies, pushing hard for much tighter controls and limiting the number of migrants, as well as controversial measures such as leaving the European Convention on Human Rights or turning away migrant boats across the Channel. This action, in turn, will significantly worsen the United Kingdom’s ties with the European Union, as well as with its key European allies such as France.
■ The Lib Dems will push for more moderate immigration policies, closer ties with the European Union and possible electoral reforms, creating further points of contention within the government and possibly sparking a “rebellion” from the Conservative Party’s right wing by pro-Brexit lawmakers, the which will probably lead to the collapse of the government and new elections.
■ Economic and fiscal obstacles caused by renewed political instability are forcing the Conservative government to further weaken its plans for the climate and energy transition, especially if it forms a coalition with Reform UK, which is more cautious about urgency of climate change.
■ The inherent instability of a minority government creates a lingering risk of early elections, as well as the reasonable ongoing risk of government collapse, obviously leading to further political and economic uncertainty.
