Author Archives: GK Strategy

Parliament in the time of coronavirus

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.

What Might the UK’s Exit Route From Lockdown Look Like?

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Across the world, countries are gradually setting out their plans for a return to greater normality following the coronavirus lockdowns. The UK, slow to act earlier this year, is behind most other countries in reducing the spread of the virus, and our “phased exit plan” is also therefore running behind that of other countries. This is both necessary and potentially beneficial – we can see how other countries act, and what this does to the prevalence of the virus. Sadly, there is at this stage still an awful lot that we don’t know about this virus and how it spreads.

The British population has reacted to the lockdown by generally adhering to the government’s rules – indeed, shocked by the brutality of the disease and the Prime Minister’s own near death experience, British people seem less desperate to return swiftly to normality than in many other countries. But our government will be deeply concerned about the short and long term economic and social impacts of a prolonged lockdown, and it will want to see a phased return to greater normality as soon as this can safely be delivered. In the UK, we seem to be going through four phases of virus response – first denial, then severe lockdown, soon a phased exit plan, and then (eventually) a return to normality once a safe vaccine has been found and can be delivered.

Boris Johnson’s government has extended the current lockdown to 7^th May, but around this time we are likely to hear about the detail of the government’s plan for phased exit – this will likely be the longest and trickiest phase of dealing with the virus. Indeed, it is almost certainly the most challenging example of science based government policy-making in the history of the British state. As with other countries, extending the lockdown for too long will undermine and scar the economy, increase educational inequality, and increase mental health and non-virus health problems. But a too-rapid exit route will cause the virus to quickly re-assert itself with the all-important “R” (reproduction) rate moving back above 1. The latter could force further economic lockdowns over a sustained period – wreaking further severe economic damage and driving stock valuations to new lows.

Education first?

As other countries set out the exit routes from their lockdowns, we can see certain common features – as might be expected. Each country is asking itself how much “normality” can return while maintaining social distancing, and protection of vulnerable groups. But not all countries are delivering the same policy solutions. One of the areas of most contrast is education. Some countries are allowing rapid re-opening of schools, to help parents return to work and to avoid learning loss. Others are taking a much more cautious approach.

Re-opening of education is one of the trickiest issues facing the UK government. Superficially, re-opening schools seems an obvious early step to take – young people appear less vulnerable to the virus, while many parents need schools to restart if they are to get back to work. But school re-opening is a tough call. Not only does it send out a powerful “back to normal” message that could undermine social distancing, but it means that other groups – teachers, support staff, parents dropping off their children – are likely to come into much more contact. And if children don’t appear to be particularly vulnerable to the virus themselves, we don’t yet know for sure how much they may spread the virus to family members and friends.

The government has yet to decide upon a firm strategy for schools but the Education Secretary, Gavin Williamson has outlined that it will be done in a “phased manner” and there will be around three weeks’ notice of re-opening to allow head teachers time to prepare their institutions for a “new normal”. This implies that the earliest date for school re-opening is after half term ends, on 1^st June. At present, the government seems minded to allow year groups 10 and 12 to return first in secondary schools. These are the year groups taking GCSEs and A Levels next year. There could also be a limited return for younger children in primary schools – to help parents return to work. But if all primary aged children return at once, how would social distancing be maintained? This is an immensely difficult challenge, with no easy solution.

In short, a phased return to school from 1^st June seems likely, but this may not include all year groups and there has been a strong indication that many schools will not return to normal until after the summer holidays.

Open for business (only if you can implement social distancing)

If schools aren’t going to be in the vanguard of the exit plan, what might be? Some countries are deciding to return to normality through a geographically differentiated strategy – with high risk areas taking longer to transition out of lockdown. The UK government appears to have rejected this approach – though there is some scope for the devolved governments in Scotland, Wales and Northern Ireland to make slightly different plans.

The most obvious first step for the UK as a whole would appear to be to allow businesses to re-open, based on their capacity to socially distance and their lack of ability to operate from the home environment. This could happen as early as mid-May, though restaurants, shopping centres, pubs, and other such businesses might have to wait a lot longer. If there is going to be a widespread re-opening of business, the government will want to be able to “test, track and trace” to as large an extent as possible. Without such an approach, the decline in social distancing could easily cause a surge in virus prevalence. The government will also expect social distancing to be implemented in the workplace – which might mean businesses re-opening with a reduced workforce or with other constraints on normal working. Finally, not least in major population centres, some measures to protect those using public transport seem necessary – and this could involve the compulsory wearing of face masks.

Also in this first stage of the exit we could see a softening of rules around social distancing – allowing people to regularly meet with a wider group of friends and relatives. But older and more vulnerable people will need to maintain social distancing, and it seems very unlikely that larger public gatherings or sporting events attended by spectators would be allowed.

The next phase – moral and political challenges to navigate

If this is what phase one looks like, phase two could begin in early June with the limited re-opening of schools. Presumably, this would be accompanied by stronger signals that people are expected to return to work, except in the limited number of sectors where social distancing would be very difficult. At this stage, the government will need to consider the future of the Coronavirus Job Retention Scheme – due presently to cease at the end of June. This will be a very tough decision – extend the scheme too far, and the cost is immense. But bring the scheme to an end, and the government will take the blame for mass redundancies, not least in sectors that are still locked down. Make the scheme more flexible, and the cost may rise further and the withdrawal process may become more politically tricky. Perhaps the most sensible thing would be to extend the scheme beyond June, but only for sectors where government rules prevent a return to normality – restaurants, pubs, airlines, could fall into this category.

What else? Well, by now we are likely to be dealing with a global situation where some countries are seeing great success in controlling the virus, while others are not. A highly open country, such as the UK, with a massive tourist industry (not least in London) faces a huge risk of re-importing the virus, and wrecking its own recovery. So tighter control of border entry maybe necessary – with routine screening of passengers at entry points, not least from affected countries.

Phase three of a return to normality would likely be implemented in the Autumn – re-opening of all businesses, and full re-opening of schools in September. Ideally, older and vulnerable people would then be able to mix more.

But the appropriate word is “ideally”. All of these carefully laid out plans could be wrecked by a new surge in the virus, which – as we have already seen – is both deadly and capable of spreading with frightening speed.

One reason why the UK government should not feel rushed to implement its plans, is that it has the opportunity to see what is now going to happen in the countries where re-opening is taking place. Many senior health advisers are clearly worried about further significant pandemic peaks – as panicked governments and bored populations rush to return to normality. The best laid out “phased exit plans” may be seriously knocked off course by the immense challenge of managing populations back to “normality” without allowing the virus to spread again.

It would be an astonishing public policy achievement if the world could escape from this with just one pandemic peak. There must be a significant risk (perhaps more than 50%) of further significant virus outbreaks (and associated toughening of control measures) before at some stage, perhaps in mid-2021, the scientific community rides to our rescue with the vaccine we need to safely return to true normality.