Author Archives: GK Strategy

David Laws, GK Strategic Advisor – Views on the Spending Review

With the UK and world economy facing unprecedented economic disruption, there has been little peace at Her Majesty’s Treasury for many months now, and the Autumn looks to be just as busy – the Chancellor has promised to deliver a Budget and a multi-year Spending Review, and both (as well as Brexit!) are going to take a great deal of preparation.

The focus of the Budget is likely to be on sustaining and restoring economic growth, in order to prevent a surge in unemployment as the Furlough Scheme ends. If the economy is sagging again, the Chancellor could consider a reduction in VAT, though the impacts of this might be modest if growth is being suppressed not by consumer incomes but by a second virus surge. Other options include reducing employers national insurance contributions or even (whisper it!) extending the Furlough Scheme for any sectors still “shut down” by COVID-fighting regulations. Extending the Furlough Scheme or “picking sectors” to stay in the scheme are certainly not options the Chancellor wants to adopt, but all bets are off if there is a significant second wave of the virus.

But what about the Spending Review? Given the government is projecting a fiscal deficit this year of mind-boggling size (twice the level of 2009/10, after the financial crisis), you might have thought that the Spending Review would be all about cuts and dividing up the pain. But the Chancellor and Prime Minister don’t want to see a return to austerity – or certainly not yet. They would be worried that spending cuts would drive economic growth back down, and they also appreciate that there is limited appetite for more austerity after ten years of squeezing the public sector. Somewhat surprisingly, therefore, the Chancellor is still planning to set future spending plans (three years worth for current spending, and four for capital spending) in which spending will be rising modestly in real terms – this combination of a massive deficit and higher real spending has only really been experienced previously in war years.

Other than modestly rising real spending, what should we expect from the Review? Well, continued largesse for the NHS and social care, as the government has to write a spending “blank cheque” for COVID related costs and for helping the NHS catch up eventually with the growing backlog of non COVID work. And no doubt there will be significant other public spending pressures from dealing with the pandemic.

But the government can also be expected to use the multi-year settlement to “look beyond” COVID and seek to deliver some of the pledges in its election manifesto. This could include more spending in targeted areas of the education system, perhaps to improve post-16 technical and vocational education and to “level up” opportunity in areas of the country with poor education outcomes. It will also include more infrastructure spending – perhaps targeted towards areas such as the North and Midlands, where the government has both economic and political aspirations. It will be fascinating to see if the Prime Minister’s adviser, Dom Cummings, manages to secure real money and policy substance to back his ambition to spread new science and innovation industries across the country, and out of London and the South-East. How will the government choose to back the “winning sectors” of the future, and can these businesses really be nurtured in the parts of the country that arguably most need the extra investment? And what of the pledge to back the zero carbon businesses of the future? How will that be realised?

The Spending Review also pledges to look at the way in which central government delivers public services and infrastructure. Whitehall civil servants will be looking nervously at what this might mean. Will the civil service be dramatically “re-purposed”? Will more powers be devolved from Whitehall and Westminster?

As well as announcing all the “positives” about extra spending on health, education, science and infrastructure, we need to look at what the government does about some of the more challenging items in the Chancellor’s inbox. Will there be a serious attempt to properly fund social care and to re-consider the split of social care costs between the private and public purse? Will the Chancellor signal a move away from the state pension “triple lock”, which could be very expensive over the next few decades? How can a government so dependent on pensioner votes cut back on future pension related costs?

We also know that in spite of the current growth in public sector wages, the Treasury will want to reduce public sector settlements in 2021 and beyond, to help control public spending and avoid public sector wages moving above those in the private sector. With inflation likely to be very low, private sector wage growth could collapse, requiring some much tougher public sector settlements.

In this year’s Spending Review there will be relatively little of the pain and anguish that have characterised other such reviews since 2010. But with the public sector deficit surging to 15-20% of GDP, the pain cannot be delayed indefinitely. There is a reckoning to come on taxes and spending. But not for now.

Parliament in the time of coronavirus

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Parliamentary Select Committees have never been more important in shaping policy, nor as accessible to organisations who have the expertise and insights most needed by Government.

Social distancing has presented a perfect storm of challenges in Westminster. The traditional emphasis on face-to-face engagement in the chamber and tea rooms combined with a long-held resistance to incorporating new technology into proceedings has meant that the institutions of Government have had to evolve quickly or cease to function.

Credit then to the Speaker, Lindsay Hoyle, and his office who by in large were able to ensure the technological capabilities were in place for remote voting and digital debate during a time of national need. Controversially though, Leader of the House, Jacob Rees-Mogg, mandated MPs to return in person to Parliament from June – putting to an end the hybrid virtual working model. Some MPs are now put in the invidious position of having to choose between representing their constituents and putting their health – and indirectly that of their families and local communities – at risk by continuous visits to the Capital City.

There is some relief then that Parliamentary Select Committees, the bodies that scrutinise each Government department’s work have been granted permission by the Speaker to continue to work and hold sessions remotely – at least until September. There is agreement that this will assist Committees to operate in the most effective way possible. Bernard Jenkin MP, chairman of the influential Liaison Committee, has said that it would ensure all MPs could participate “on a fair and equal basis during the current pandemic.”

Importance of Select Committees & how they have adapted during COVID-19

It is important that these Committees are supported to operate as effectively as possible within the circumstances because, as GK has outlined previously, the profile and independence of Select Committees is increasing, as is the volume of inquiries they undertake. The pandemic appears to be accelerating not reversing these trends. GK has seen first-hand how effective Committees have been in scrutinising the Government’s response and even influencing its policy agenda.

Virtual Inquiries are the most obvious change to the work of Select Committees, and this has influenced the behaviour of MPs and their interactions with those giving evidence. Circumstances dictate that MPs need to be focused and economical with their questions. Furthermore, there seems to be less time and opportunity for political grandstanding and point-scoring. However, this is also no doubt influenced by the sense of unity that comes from a national crisis – perhaps a manifestation of the more constructive tone being championed by the new leader of the opposition, Keir Starmer.

However, it is clear that not having to appear in person has lessened the fear factor for Ministers being questioned by Committee members. The ability to claim a Ministerial scalp or get the headline-grabbing ‘gotcha’ moment has been diluted.

For instance, the Prime Minister’s first appearance in front of the Liaison Committee last month exposed a lack of detailed knowledge, and his inability to take some subjects seriously, e.g. female representation on senior decision making bodies. He used a mixture of charm, diversion and bluster to get through some of the trickier moments.

Overall, he came through it relatively unscathed. However, the session would have been significantly more awkward with a higher likelihood of negative press had the Prime Minister been physically in front of the Committee, where they could see the whites of his eyes and be less constrained by time and internet connectivity.

How external organisations should engage

COVID-19 has demonstrated that the Government does not always have the in-house expertise to devise a strategy and ensure practical delivery of the solutions that will manage the virus and lessen the disruption. This has been demonstrated by the uneven success of antigen testing roll-out, coordinating test, track and trace and the availability of PPE.

The Government has consulted and asked for help because they have not had all the answers to this new and unfamiliar adversary. No.10 and Cabinet Office have worked overtime to understand how non-government bodies can support with solutions and triage their submissions. This refreshing openness from Government is now extending to medium and longer-term plans and solutions. Direct award of contracts also means that public-private collaboration can be agreed faster.

The proactive listening mode has also extended to Select Committees who have a duty to focus on the impact of COVID-19 within their remit. To do this effectively, they need to be briefed on the latest issues and challenges within sectors and to consult for potential solutions. As an example, The Education Select Committee has just finished collating responses on their mammoth inquiry into how “COVID-19 is affecting all aspects of the education sector and children’s social care system.”

The Committee is seeking views on short and long term disruption and the range of stakeholders who impacted and feeding in submissions is enormous – from nurseries to apprentice schemes and local authorities to care providers.

This pressing need presents golden opportunities for trade associations, the third sector and commercial organisations with the appetite to engage. Never has Parliament been so keen to learn and be advised by such a diverse range of stakeholders.

Organisations should be ambitious about making representations to Select Committees. GK recommends monitoring the most relevant Committees to your sector, taking advice at the earliest indication of a relevant inquiry or call for submission being announced. This allows time to liaise with committee clerks about the scope of an inquiry and provides sufficient time to agree on key messages, draft a written response and – if called to give evidence – begin developing Q&As and taking an assessment of the characteristics of the Committee.

GK are specialists in preparing organisations for the unique and challenging experience of providing evidence to a Parliamentary Select Committee. Our training package is tailored for each client depending on their needs, objectives, and the scope of the inquiry. You can find out more about our offer here.

Brexit: Where next?

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Only a year ago, British politics was dominated by the debate about Brexit. It says a lot for the impact of COVID-19 that since early March the virus and its huge economic, health and social impacts have relegated Brexit news to a few paragraphs on the inside pages of one or two Brexit-focused newspapers. But Brexit has in no sense gone away. The end of the transition period on 31st December 2020 looms ever closer, and Boris Johnson has made clear that in spite of COVID, he is not willing to contemplate an extension of this transition period. Boris Johnson may not wish to disappoint the Eurosceptic voters he was able to win over in the December 2019 election, and he may also be calculating that pushing Brexit through during this period of extraordinary economic turbulence will both mask any negative impacts and also put pressure on other EU member states (more nervous than ever about the state of their economies) to strike a pragmatic deal

To download the paper click here: Brexit Where next

The Outlook for Economic Policy. By David Laws, Adviser to GK.

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For a politician who has presided over a likely quadrupling of Britain’s budget deficit in a period of just over 3 months, Chancellor Rishi Sunak looks a remarkably relaxed man. Like most Finance Ministers, he realises that the actions he has taken – spending more, taxing less, nationalising large parts of the UK’s private sector employment, and letting public borrowing skyrocket – have been far less politically and economically risky than doing nothing, in the face of an economic calamity.

You have to look back hundreds of years, to before reliable economic data was collected, to find a period where the UK economy has contracted so much and so swiftly. The Chancellor has another reason for being more relaxed than might be expected – record low interest rates mean that the government faces a zero or even negative cost of borrowing. That has removed the concerns about debt “sustainability” that usually arise when borrowing takes off – on this occasion, there is no immediate prospect of the UK or any other major economy facing spiralling debt service payments of the type that have hit countries such as Argentina, Greece or Italy in the past.

It would be wrong to suggest that economic policy choices to date have been “easy”, but in a sense they have been almost inevitable – as was the near nationalisation of most of the banking system back in 2007/2008, when the alternative was the complete collapse of the financial system. From now on, some of the choices facing the Chancellor and the Prime Minister will become more difficult – not least as large parts of the “life support” offered to the economy since March are steadily withdrawn. Particularly notable, of course, is the phasing out of the “furlough” scheme over the next four months – no wonder Boris Johnson is keen to get the economy and society open again.

So, what should we expect on economic policy over the next few months? It is worth us focusing on growth, public spending, and deficit management.

Firstly, growth. It’s clear that the government’s main focus now has to be on re-opening the economy (as far as the virus will allow) and preventing a large increase in unemployment and business failures, as the furlough scheme is withdrawn.

A set of new economic measures can be expected to be announced before the end of July – but the scale of any package remains unclear. Measures to boost infrastructure spending, ease planning restrictions, and help establish more science-based businesses outside London and the South-East would all be in line with previous government policies. There could also be additional help for small businesses and possibly an extension of the scheme to delay business VAT payments. The former Chancellor, Sajid Javid has advocated potentially more expensive moves to deliver a short term boost to the economy – including a cut in VAT and/or a cut to employer national insurance contributions. Both measures would be expensive, and it’s not clear that a cut in employer national insurance contributions would have a large employment impact. Whether the Chancellor is willing to further boost borrowing to pay for such tax cuts will depend partly on a political calculation and partly on the speed with which the economy appears to be recovering from its COVID-induced slumber.

Secondly, public spending. It’s clear that the government does not wish to risk a return to full blown austerity. The “easier” savings in public spending were made long ago, and in the short-term the economy could not bear additional deflationary measures. Instead, as well as extra infrastructure spending, the government is likely to want to spend money to protect health services and to avoid a big rise in youth unemployment. Extra support for technical and vocational training, and for apprenticeships, would have a strong policy rationale (following on from the government’s extra £1bn for schools). Meanwhile, difficult decisions will need to be made over public sector pay. If inflation remains highly subdued, the government could make a good case for a pay freeze next year, but this will be politically sensitive – not least for workers in the NHS and care homes.

Finally, the budget deficit. The Chancellor won’t worry too much about the short-term rise in the deficit, and will expect interest rates to remain low. He will treat the COVID shock as a one-off extreme incident, justifying a large rise in the national debt, which may have to be paid off over many decades. But the Treasury cannot afford to be as relaxed if the budget deficit remains high after the economy has recovered. With the prospect of a rapidly ageing population, and the associated rise in pension and health spending, the government would not want borrowing to get stuck at a heightened level. Nor will politicians want to take difficult decisions too close to the next General Election. So over the next 18 months, the Chancellor may need to consider a range of measures to gradually reduce the deficit, by raising tax revenues and controlling key areas of spending.

What type of tough medicine could be on the agenda? Well, the “triple lock” on the state pension (a Liberal Democrat policy which I recall negotiating with the Conservatives in 2010) might be watered down. Employee national insurance contributions might be extended to pensioners who are still in work. The Chancellor has already put down a marker about reviewing the tax status of the self-employed (a “courageous” policy for a Conservative Chancellor if there ever was one). Other possibilities include higher taxes on those who have come through the pandemic largely unscathed, including (broadly) those on higher incomes. We are likely to continue to see speculation about the future of pension tax reliefs, and more pressure for additional “green taxes”.

In short, while the Chancellor cannot afford to rush into a second round of austerity, nor can he and the Treasury forever ignore the medium and long term impacts of COVID. Our current enforced lockdown will be paid for by future generations, but within a year or so the present generation will likely also be asked to make its contribution.

Assessing bolt-on risks and opportunities in a time of huge political and economic uncertainty

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It’s an uncomfortable truth, but the impact of COVID means that many companies now seem attractive and viable investment opportunities.

Many of the investors we speak to expect to see more appealing valuations and more assets becoming available, as owner managers and parent companies work to de-risk, improve their balance sheets, or keep their businesses going. Bolt-on opportunities over the next 3-6 months seem particularly appealing, while the main market recovers.

But this will be against a backdrop of considerable political uncertainty – in terms of how the lockdown will be eased and what measures governments will take to boost their economics and improve their fiscal situation.

This period will be even more uncertain than the terrain GK navigated for clients after the global financial crisis. The investors that got a measure of these risks early on were able to able to benefit from investment opportunities that others avoided.

Policy changes are likely be extensive as we emerge from lockdown and over the longer term. New taxes and reduced public funding in many areas (as resources get reallocated to heath & social care) could harm the prospects for many businesses.

And it is still uncertain how and when many sections of the economy will get back to something resembling pre-COVID trading levels, given that it could be a long time before UK social distancing measures are significantly reduced (to the 1-1.5m levels that most countries use) for offices, bars and restaurants and leisure facilities.

Some policy changes could affect some sectors or business models more than others. For many FS or subscription-based businesses, for example, COVID-driven payment holidays might be extended. And gig economy based businesses could face new regulations in the light of widespread dissatisfaction with how companies and governments have treated gig economy workers.

So how can investors assess these risks and opportunities for potential bolt-ons? We have already written in detail about how businesses and investors can prepare to emerge from lockdown, but assessing the political risks and opportunities relating to bolt-on deals presents different challenges.

The bolt-ons that many investors find attractive are in niche, specialist areas, so they are more exposed to changes in regulation or taxation or public procurement than bigger businesses that can flex around more diverse offers.

This makes it all the more important to focus on the material risks and opportunities, clearly articulating what specific political risks could mean for each individual business.

We recommend that investors or companies assessing bolt-on opportunities undertake political due diligence focused on identifying any red flags and the scope to mitigate them. More comprehensive risk and opportunity assessments can be undertaken post-deal.

The same applies to ESG: time and other resource factors might limit the scope for comprehensive ESG DD, but this is no excuse for neglecting ESG – especially at a time when public and private buyers have heightened COVID-related concerns about key ESG issues like workplace and product health & safety and companies’ treatment of their workforces and vulnerable consumers.

We expect a lot more bolt-on activity in 2020 and can help investors and companies identify and mitigate the key risks early on.

For more information, please contact robin@gkstrategy.com

COVID-19: How to prepare to emerge from the lockdown

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The UK is starting to move into the next phase of the Government’s response to the COVID-19 crisis.

Businesses need to understand how the landscape will evolve again and what part they can play in shaping, responding to and delivering the Government’s priorities for an exit from lockdown.

Our new paper on the crisis – COVID-19 How to prepare to emerge from the lockdown – answers the three key questions that businesses and investors need to address:

How can business engage with some of the recent and ostensibly temporary changes in procurement practice, public sector service delivery, and regulation?
How might lockdown restrictions be lifted and how can business help inform this process?
How can business prepare for a very different policy and funding landscape once the worst of the crisis is over? What will be the new normal?

We set out how businesses can emerge from the lockdown in as strong a position as possible and help plan for and shape longer term changes in public policy, service delivery, funding and regulation, building on some of the changes we previously identified in COVID-19: Short and long term policy impacts for investors and companies.

We are at another critical moment in this crisis. Businesses need to be well-informed and equipped to navigate and shape what comes next.