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17 March 2015

A spring in the step at the Lib Dem conference

My personal 'red line' for coalition negotiations about Brexit after May 7th. Voters must be offered three options in an early referendum.

The Liberal Democrats (LDs) completed a remarkably successful spring conference in Liverpool last weekend. As electoral `experts’ are predicting that the Party’s MPs will fall from 57 currently perhaps to 14 (Electoral Calculus – probably the lowest amongst forecasters), party activists might have been expected to be in despair. But not a bit of it! Instead, they are aware that support is holding up much more strongly in many seats held by LD Parliamentarians than national opinion polls suggest.

Ironically, the UK’s `first past the post’ electoral system may be the Party’s salvation by mobilising strong local support in these seats. So the possibility of more than 40 LD MPs after the 7th May general election should be factored into the complex calculations about the political shape of a future UK government. If the LDs turn out to be king-makers, then their influence on the risk of the UK leaving the EU (Brexit) could be decisive – especially if it relates to sustaining a Conservative/LD Coalition.

Why the Brexit `boil’ must be lanced

The UK has become a country addicted to capital inflows to balance the massive current account deficit on payments with the rest of the world. This must be resolved sooner or later - quite separately from a reduction in the Government’s deficit. According to European Commission data and forecasts:

  • The Government budget deficit in the year of the last election was 10% of GDP – half as big again as the euro-area average, and larger than all but three euro-area states. Five years later, the Coalition Government has halved the expected budget deficit for this election year – but the euro area has adjusted even faster. The UK deficit is now twice the euro-area average, and bigger than any euro member (though France and Spain are not far behind).

  • The real concern is with the balance of payments to/from the rest of the world. The trend had been deteriorating for more than a decade and, in the year of the last election, the current account deficit was 2.6% of GDP. However, seven euro states and three non-euro states were worse – versus a euro-area average surplus of 0.4% of GDP. In the current election year, the expected UK deficit has risen to 3.8% of GDP versus a 3.2% of GDP surplus expected for the euro area. The UK deficit will be more than twice any other EU member (except Latvia). Moreover, the UK’s own statistical agency – the Office for National Statistics – calculates the UK’s deficit at 6% of GDP - £100 billion - in the last twelve months. This is the ticking bomb that simply awaits a trigger. The Brexit debate could easily be that trigger.

The tide of warnings from leaders of industry and finance about the risk to inward investment has been rising sharply in recent months. They highlight the importance of access to the Single European Market (SEM) as a major reason to invest in the UK. So it was not surprising  that Business Secretary Vince Cable – the minister closest to the feelings of industry - warned in Liverpool that even a narrow referendum vote in favour of the UK remaining part of the EU would "scare off" overseas companies from investing in Britain. As he pointed out, “If the result is negative, or even close, it will leave Britain in a no-man's land: diminished, marginalised, and irrelevant.” That is hardly the climate to continue attracting £100 billion of capital inflows each and every year. The boil must be lanced.

© Graham Bishop

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