What next for UK politics in 2023?

As 2022 has drawn to a close, it is worth reflecting on the sheer political instability the UK has been through this year. A cost of living crisis fuelled by spiralling inflation following a war in Ukraine, three Prime Ministers, a bond-market in meltdown while the pound sterling sank to its lowest ever level against the dollar and the death of the world’s second longest reigning monarch. All while coming out of the Covid-19 pandemic. 

It’s the economy, stupid

So what more could possibly be in store this year? Former US President Bill Clinton famously said ‘it’s the economy, stupid’ and those words ring largely true for the future state of British politics in 2023, which will largely be dictated by the state of the UK economy. Rising energy bills and high inflation eating away at wages and savings will continue to dominate the list of political priorities next year. And in a nutshell, the better the economy performs, the more likely the Conservative Government improves its currently dire position in the polls.

There is cause for the UK Prime Minister Rishi Sunak to be confident that he can recover lost ground to Labour and regain the trust of the voters. Sunak and his Chancellor Jeremy Hunt have reassured the markets with their Autumn Statement announcing the Government’s approach to the economy, as set out in the Polis Intelligence Briefing: Snapshot Special in late November. The pound has recovered after its collapse against the dollar in the aftermath of former Prime Minister Truss’ mini-budget while yields on 10 year government bonds are now higher than they were under Truss. 

Inflation will be the key to determining how the UK economy performs in 2023 and the first encouraging signs of falling inflation have emerged. Consumer-price inflation fell to 10.7% year-on-year in November, down from 11.1% in October. Inflation is set to fall given government support with household energy bills and less demand for UK goods and services leading to slower price increases. The Bank of England predicts a sharp drop in inflation from mid-2023 and expects inflation to near the 2% target by the end of 2024. A former special adviser to numerous senior Conservative cabinet ministers told the Polis Analysis CEO that he can envisage a scenario where the Conservatives can benefit from falling inflation and reverse their political fortunes. 

Businesses are responding positively to early signs that UK inflation should fall next year. According to a recently published survey by Lloyds Bank, over half of UK companies expect to generate higher revenues in 2023 and 63% believe they will be more successful. Business confidence, which often leads to business investment, is therefore on the up and that news will be welcomed by those in Downing Street. 

Recent data published by the Office for National Statistics also shows early signs of an improving economic picture next year given the inactive working age population has fallen in recent months, which could ease labour shortages and help lower inflation. In fact, some economists even take the view that economic crises are good for productivity as those of working age are forced back into the labour market while unproductive companies collapse, leading to a more efficient reallocation of capital. 

While there are early signs indicating 2023 may lead to more positive economic news, the fundamental situation remains bleak for the UK economy. The OECD has forecast the UK economy will stagnate throughout next year and grow at a rate of 0%. The UK economy contracted by 0.3% of GDP in July-September and forecasts expect a further contraction in the last three months of the year. Two consecutive quarters of economic contraction will mean the UK economy is in recession. And incumbent governments never fare well in recessions.

The Bank of England’s historic interest rate rises are helping reduce inflation but will have knock on effects for the UK economy. Rate rises have directly pushed up government borrowing costs while businesses may be less likely to invest when the cost of finance stands at around 6-8%. It can be expected that consumer spending will be dampened by refinancing mortgage costs and higher rents, while the banking system will treat borrowers disadvantageously if assets including house prices are valued downwards. As a senior Conservative MP told the Polis CEO recently, he ‘can’t see many incentives to growth’ and that will have political consequences for the Government’s popularity. 

Throw in the wider global forces that will also impact the UK’s economic performance next year, from the impact of the war in Ukraine on energy bills and food prices, to the untested situation of the European Central Bank shifting from buying debt to selling it, and how the UK economy will fare in 2023 becomes increasingly unpredictable. 

Will the polls shift? 

What does this all mean for the state of British politics next year then? The Labour party has a commanding lead over the Conservatives in the polls. A YouGov poll in December put Labour out in front on 48% with the Conservatives trailing on 24%. The Liberal Democrats, who according to Polis Analysis research earlier this year came second in around 90 seats won by the Conservatives at the last election, polled at 9%. Reform, a party that poses a threat to Conservative seats in the North that Labour is set to claw back, polls on 8%. 

It is unlikely that Labour will lose its commanding lead in the polls in 2023, even if the economic situation improves. Local elections are taking place across England for 242 local authorities next May and it is expected that the Conservatives will perform poorly. Governing parties never perform well in local elections, let alone against a negative economic backdrop. 

If the Conservatives do face a terrible set of local election results next year, that could spur on Tory party factional infighting. We have already seen Conservative MPs drive rebellions against Sunak’s early premiership, forcing the Prime Minister’s hand on proposals to reform planning laws and increase housebuilding, as well as a rebellion on building onshore wind farms, backed my dozens of MPs including none other than former Prime Ministers Boris Johnson and Liz Truss. The chair of the moderate One Nation Conservative grouping Damian Green is set to take the Government to task on social care funding. 

That said, the Conservatives have had a historically turbulent year, having seen three Prime Ministers and five Chancellors. Tory MPs, including arch rebel under Theresa May’s premiership and Boris Johnson loyalist Jacob Rees Mogg, are calling for unity and the need to support Sunak so the party has a chance at winning the next election. 

A former Downing Street adviser told our CEO at Polis that he expects the situation to improve for the Conservatives next year, not least given Sunak’s favourable polling vis-à-vis Labour leader Sir Keir Starmer. An Ipsos Mori poll found 41% of voters believe Sunak is a more capable Prime Minister when set against Starmer, while 35% believe Starmer is more capable than Sunak. The Prime Minister also outperforms his party in the polls. Ipsos Mori found in November that 47% of the public favour Sunak, while just 26% like the Conservatives, the lowest score for the party in 15 years. Sunak’s personal popularity combined with a potentially improving economic climate in 2023 could see his Government fare better with the public. 

That said, the Prime Minister has a mountain to climb if he is to make a splash on British politics next year. Ipsos Mori’s polling find 42% of voters trust Labour with improving the British economy, falling to 35% for the Conservatives. The mini-budget under Truss may have already led to lasting damage for the Tories’ reputation for sound management of the public finances, which has recently been a major factor in helping the Conservatives beat Labour since 2010. 

What is in it for you?

There are real consequences for our readers in the UK and beyond when it comes to the performance of the British economy next year. On the one hand, the Bank of England’s forecasts on inflation falling from mid next year will help alleviate the financial challenges currently facing households and businesses. That said, as the UK comes to terms with a higher interest rate environment, our UK based readers will challenge with mortgage refinancing, accessing the housing market and rising rental payments. Ultimately, our European readership will still see their finances held hostage by global forces given the war in Ukraine is having a direct impact on the household energy bills of Europeans. 

The UK’s economic performance also has global ramifications, particularly for major trading partners. The UK’s biggest importers and exporters, from EU countries including Germany, the Netherlands and France, to the US and China, will all feel the economic benefits of an improving British economy. Countries that are large recipients of international aid spending from the UK such as Afghanistan, Nigeria and Pakistan will also be looking closely at whether the UK economy picks up, although it is unlikely the British economy will sufficiently grow to allow for increased aid spending given the OECD’s zero growth forecast. 

When it comes to the politics, the results of local elections in May 2023 will have an impact on the rate our readers pay in council tax and how efficiently local public services such as rubbish collection are run, as if councils change party hands then policies will change with them. However, the state of the main parties in the polls will not have a major impact on government policy given the next General Election will likely not take place until late 2024. That said, if Sunak can make headway in the polls providing the economic situation becomes more favourable, he may have more confidence to take on rebel factions in his party.

Take his approach to Europe. There is talk of a European rapprochement, from improving cooperation with France on migration, energy and security, to adopting a more pragmatic and conciliatory approach towards negotiating the Northern Ireland Protocol with the European Union. If Sunak sees a change in political fortunes in 2023, he may have enough room for manoeuvre to pursue a more constructive relationship with the EU despite likely protests from some Brexiteers in his party. This would have a broader impact on issues that matter to our readers in Europe, from how migration is managed to whether physical barriers to trade can be tackled to the benefit of workers and businesses. 

2022 has been one of the most volatile in recent British political history. Prime Ministers have come and gone, UK inflation has hit record highs and so to have food and energy prices. The war in Ukraine waged on, with the UK playing a major role in arming Ukraine military forces, all while the UK lost her Queen, the pound and bond markets were in crisis following Truss’ mini budget and both Johnson and Sunak were fined for breaching their own Covid-19 rules. It is therefore a dangerous game to predict how 2023 will unfold but out of uncertainty comes a clear certainty that how the Government polls next year will come down to one issue above all. It’s the economy, stupid.