Tax Analysts Blog

Unexpected Tory Victory Has Major Ramifications for Europe

Posted on May 12, 2015

Defying polls, pollsters, and the specter of a hopelessly fractured Parliament, the Conservatives won a resounding victory in the U.K. election last week. The end of the coalition with the Liberal Democrats will free David Cameron to follow a purer Tory agenda and raises major questions about the United Kingdom's future within the European Union and its approach to deficit management and international tax policy.

In the days leading up to the election, pollsters (including Nate Silver's vaunted overwhelmingly predicted that neither the Conservatives nor Labour would win a majority of Parliament. In fact, the consensus that Cameron would win a plurality began to erode, as many polls showed both parties winning around 275 seats. Cameron's party ended up winning 331 seats, a net gain of 24 seats. Labour took only 232, while the Scottish National Party won a whopping 56 seats. Cameron's old partners, the Liberal Democrats, will have only eight MPs in the next Parliament. The Tories won by performing better than expected in England and by stealing a number of seats away from their coalition partners, who were basically relegated to minor party status.

In the wake of Cameron's success, virtually all of the press coverage has been on the future of the United Kingdom in Europe (and also on what the rise of the Scottish National party means for Scotland's role within the United Kingdom, although it is very unlikely the Conservatives will give any more concessions after allowing a referendum last year). Cameron is definitely committed to holding a plebiscite on whether to keep the country in the EU in either late 2016 or 2017. This has created a level of uncertainty that has slowed down business's euphoria over a Tory victory.

The Tories are already using the referendum as a means to push renegotiation with the EU. The president of the European Commission, Jean-Claude Juncker, said Friday that he would work with the prime minister “to strike a fair deal for the United Kingdom in the EU.” Most analysts don't foresee this as meaning that renegotiation will be orderly or smooth. Cameron wants more U.K. autonomy on regulatory, finance, and immigration issues. And he will use the referendum on continuing U.K. membership to wring as many concessions as he can from Brussels. If the Conservatives get enough of what they want from Juncker, they can promse Cabinet support for a yes vote on remaining in the EU. Withholding that active government support would significantly strengthen euroskeptics. Remember that although UKIP won only one seat in the new Parliament, it received the third most votes (12.6 percent).

A withdrawal from the EU would obviously mean major tax and fiscal policy changes for the United Kingdom. It's difficult to speculate on the exact consequences because much will depend on the status of the country's relationship with the EU after the renegotiation. In the short run, Cameron's win means continued U.K. resistance to the EU's financial transaction tax (a major point of contention) and a fight to ensure that the EU doesn't do much to change the status of the City of London.

Outside Europe, there are other tax policy consequences to the Conservative victory. Cameron has pledged to keep the 20 percent corporate tax rate and to fight to ensure the United Kingdom remains business friendly (read: It will continue its transformation into a tax haven). The Tories talked a lot about fiscal policies to encourage small businesses, but there is some skepticism whether the country can afford it. That's because the Conservatives are viewing their win as a validation of their austerity and deficit control policies.

To cut the deficit without raising income taxes (another pledge) will mean a continuing focus on tax evasion and making multinationals pay a fair share. The diverted profits tax isn't going anywhere, and it wouldn't be a surprise to see similar levies or enforcement measures come out of Downing Street in the next few years.

Read Comments (1)

edmund dantesMay 12, 2015

The resounding victory by conservatives in contravention of the advance polling
also could have important ramifications in the USA. It should embolden
conservatives to stick to their principles, and to stop trying to tailor their
messaging to please the liberal media.

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