Economic well-being and the UK election

Who will win the UK general election next week? The short answer is that nobody really knows. This is not just because you can never be sure of a result in an election until the votes are in, but because in this particular general election for a new government in the UK, to be held in just one week on 7 May, the polls suggest that the result is really is too close to call (see http://www.electionforecast.co.uk/).

According the latest polls, the two main parties in British politics, the ruling Conservatives and the opposition Labour party, are neck and neck, with about 33% of the share of likely vote. What is also complicating matters in making a prediction is that the vote for the smaller parties could make the difference.

First, the junior partner in the current coalition, the Liberal Democrats, which got 23% of the vote back in 2010, is polling only 8-10% now. Nobody is quite sure where disillusioned Liberals have shifted their vote. Second, the United Kingdom Independence Party (UKIP), a Eurosceptic, anti-immigration party, is polling about 12-15%. UKIP was the largest party in the European Union elections last year and then won a by-election where a sitting Conservative defected. This led to media frenzy that this party would hold the balance of power in the next UK parliament. At the time, I wrote a rare political post saying that this was nonsense (see https://thenextrecession.wordpress.com/2014/10/10/media-mud-over-ukip/). I forecast that the UKIP vote would dissipate in a national election and so it is proving. Current polls suggest it will get only one seat and even its colourful leader, Nigel Farage, may fail to enter parliament. Even so, UKIP could get enough votes to affect the results of some key marginal seats between the Conservatives and Labour in England.

But the real joker in the pack is the rise of the Scottish National Party (SNP). The referendum on independence for Scotland was eventually defeated last September (again as I predicted). However, the aftermath has been a massive turn against the Labour party, the traditional majority party in Scotland, because of its support of austerity and neoliberal politics over the last 15 years. The vote for independence was 45% last September and that is the share of the vote that the SNP appears to be polling (possibly even more), while the 55% that voted against independence are distributing their vote among three parties: Labour, Conservative and Liberal.

The SNP has cleverly positioned itself as a more radical, anti-austerity party (although this is an illusion – there is no difference between the fiscal austerity plans of the SNP and Labour) and on current polling could take the vast bulk of seats in Scotland. That would be enough to deny Labour a majority in the UK parliament. The current seat projections by top psephologists like Nate Silver (see post, https://thenextrecession.wordpress.com/2012/11/22/bayes-law-nate-silver-and-voodoo-economics/) suggest that neither the Conservatives nor Labour would be able to form a workable coalition in the next parliament, let alone a majority. So a ‘hung parliament’ and a minority government is the forecast right now.

But will that turn out to be the case? Well, although 326 seats is required for a majority officially, given that there will be a Speaker who does not vote and one independent, plus no turn-up by the Irish Sinn Fein MPs, actually a government could be formed if it commands 324 votes. That may be possible for one of the potential coalitions.

Back in 2009, before the last election, I made a rash prediction: that the economic cycle of boom and slump may turn out to be lucky for the Conservatives if they won the 2010 election (which they did narrowly to form a coalition with the Liberals). The Great Recession had just ended and so economic recovery could then last through to 2015 to allow the Conservatives to win a new term.

Labour stayed ahead in the polls from 2010 but then things began to turn in 2013 as the UK economy at last showed some signs of life and the government eased austerity measures just a little. Meanwhile UKIP and the SNP continued to gain.

So things have evened up. What will decide the election? Well, in my view, it is hardly ever the campaign itself. Usually, the poll share before a campaign is close to the result on the day, although this time, there are so many moving parts it might make a difference. Yet the polls have shown so far a great stability: the share of vote to the competing parties has hardly budged with just one week of the campaign left.

Also, I think there is fairly good evidence, despite the continual navel gazing of the media, that the personalities of the leaders do not make much difference (after all, the most grey and uninteresting leader ever of the Conservatives, John Major, won in 1992 over a charismatic opposition Labour candidate. Back in the 1920s, Stanley Baldwin, another non-personality, won successive elections.  It’s not even the specific issues that decide the result: immigration controls, NHS, Trident, austerity etc.

What really decides things is the state of material well-being of the majority. Are things getting better on the whole?  There’s been some research on this for US presidential elections. There is a good correlation between growth in real disposable income per head one year prior to an election and the margin of victory for the incumbent.

In 2012, Obama’s popular vote margin was 3.8%, while his expected margin (based on the real disposable income data at the time) was 4.6%. The 2008 election outcome (near the lower-left corner of the figure) was also quite consistent with the historical pattern; McCain trailed Obama in the popular vote by 7.3 percentage points—slightly better than expected, given the dismally low −0.8% mid-year income growth rate.

As for Britain, Paul Krugman recently made a similar observation to the one I made back in 2009: “the truth is that what’s happening in British politics is what almost always happens, there and everywhere else: Voters have fairly short memories, and they judge economic policy not by long-term results but by recent growth. Over five years, the coalition’s record looks terrible. But over the past couple of quarters it looks pretty good and that’s what matters politically.”

He continues “research debunks almost all the horse-race narratives beloved by political pundits — never mind who wins the news cycle, or who appeals to the supposed concerns of independent voters. What mainly matters is income growth immediately before the election. And I mean immediately: we’re talking about something less than a year, maybe less than half a year.”

So let’s look at the evidence on income growth and the feeling of well-being for the average British voter. The fall in real weekly earnings since the last election has been the worst sustained fall since the 1930s. But in the last year, there has been a turning.

If we look at real household disposable income per head and a measure of the perception that people have of the financial situation, we find something similar. In Q4 2014, real household disposable income increased 1.9% compared to the same quarter a year ago and 2.2% above the level before the Great Recession started.  Most important, people’s perception of their own financial situation is now above where it was at the time of the last election, although it is still below the level before the global financial crash began back in 2008.

Another measure of economic well-being that is often used is the so-called misery index: the unemployment rate plus the inflation rate https://thenextrecession.wordpress.com/2011/01/29/britains-misery-index/.  If that is in double figures, then ‘misery’ is high and governments will lose popularity heavily – as it was in 2010. Currently, with the unemployment rate at 5.5% and inflation at zero, this measure suggests that misery has declined.

But there are some new measures where things do not look so rosy. The Keynesian economist, David Blanchflower, prefers what he calls a misery ratio, which argues that the unemployment rate should be weighted more than the inflation rate in any misery estimate, http://www.dartmouth.edu/~blnchflr/papers/jcmb_version_inflation_unemployment_%20BBMM.pdf. Even on his measure, things have been improving recently.

Andy Haldane, chief economist at the Bank of England, has developed what he calls an agony and ecstasy index, https://thenextrecession.wordpress.com/2014/10/18/uk-the-agony-and-the-ecstasy/. Haldane’s ‘agony index’ is a simple index of real wages, real interest rates and productivity growth (http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech764.pdf).

Haldane’s index shows that the British people and the economy have been in increasing ‘agony’ for the longest time since the 1800s, with the exception of world wars and the early 1970s. And the agony measure is still increasing as productivity continues to slow, but the pace of increase is now slowing. For more on this, see my article in Weekly Worker, http://weeklyworker.co.uk/worker/1031/agony-and-the-ecstasy/.

I have developed my own simpler version of ‘economic well-being’ as growth in real income per head LESS the unemployment rate. This measure reveals that for one year before the 2010 election economic well-being was below par. No wonder Labour lost. And it has remained below par in nearly every quarter up to the middle of 2014. But in the last three quarters, the index has moved above par.

All these measures show the level of misery or agony or lack well-being for the average household experienced since 2010, but they also show a change for the better in the last year and in the perception that things are getting better.

Is this enough for the Conservatives to pull off a victory next week as I forecast back in 2010? It should be, but the economic recovery under the Conservatives has been way weaker and taken longer than even I expected back in 2010. And all these measures hide the disparities in well-being between the professional classes particularly in London and the rest of the population. The economic recovery has been uneven in region and sectors. Just take Wales. The Welsh GDP per head is 72% of the UK average. It would take 20 years of growth at 4% a year to close that gap with England. Wales is one of the poorest parts of Europe: on a level with Hungary and the other EU accession countries.

So the recovery may not be enough to return the Tories to office. Indeed, its very weakness may explain why Labour would be ahead in the polls were it not for their apparent huge losses to the SNP in Scotland. On that aspect, this election will confirm with a vengeance that the dominance of the two-party system in Britain, partly reinforced by a first past the post electoral method, has crumbled.

In 1951, the Conservative and Labour parties between them got 97% of the votes cast. By the last election, their share was down to 65%.

It is very possible that the largest party in this election will be The No Vote party, if the turnout is below 65% and Labour and the Tories cannot get 35% of the vote. The rise of UKIP and the SNP, the first a party of English nationalism and the latter of Scotland, is set to weaken the major parties even more than before. In 1950, Scotland was more Tory than the rest of the UK. Nowadays, the Scottish Tory is on the verge of extinction. In 2010, Scotland was more Labour than the rest of the UK; but it looks as though Labour will be decimated there next week.

The projections for seats won next week suggest that neither the Conservatives nor Labour will be able to form a viable coalition, let alone win outright. However, that may change. My favourite result, based on the indicators of economic well-being, is for another Tory-Liberal coalition, with perhaps backing by the Unionists in Northern Ireland. What that means for the economy and the British people, I’ll discuss after the election.

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