Financial impact of a hung parliment
It’s amazing the conversations that some parties are having around a hung parliament. I find it as exciting as an election campaign.
Whilst some are saying that fear is not a part of their manifesto they continue to preach about financial Armageddon if there is a hung parliament.
It was put to me recently that some parliamentary organisations also have funding from hedge funds and we all know how much they like volatility. A flat market creates few opportunities for them. But perhaps he was being over cynical?
In many respects a hung parliament is of little relevance as long as the government in power has clear focused plans on how to reduce debt. We can all see the impact of debt in Greece and whilst UK debt remains at this level with an ever increasing budget, a hung parliament is of no real issue in comparison.
The key to relax the markets is whether or not they believe that two parties will be able to work together to agree a working economic policy to reduce that debt.
It is perhaps very interesting that the two normal leading parties chose not to show any real detail at all regarding their policy toward reducing the debt.
The conservatives dedicated a whole 4 pages to macroeconomic policy from its 118 and there was a considerable shortage of data contained in those four pages. Mr Brown and Cameron have plans but their lack of detail is probably more about not wanting to distance themselves with the LIB Dem’s plans.
The UK experienced the largest increase in total debt relative to its GDP (the economy) from 2000 to 2008.The UK has the second largest highest debt to GDP of the major economies, so the focus will be clear. If two parties can work together and focus on that and show the markets some joined up thinking, the threat to the markets will be minimal.
We must remember that the threat of a hung parliament has been around for some time, and in fact its almost a guarantee, but markets have carried on regardless.
The concern about debt is that interest rates may be driven up by markets and that could be disastrous for the UK given its level of debt.
Furthermore the scale and timing of cuts are key. Too many cuts too soon could damage the GDP by taking inappropriate levels of capital out of the economy and thereby driving the economy into a downward spiral.
Too little cuts could mean upwardly spiralling debt and the potential for a drop in foreign confidence and a UK downgrade which effectively means their foreign debt would cost them much more and the downward spiral continues and really starts to get a bit greecy.
The Lib Dems have a pretty strong plan on how to reduce the debt. In fact they are the only party with any real detail. Their plans involve a steady approach to reducing debt so as to allow the economy to be able to take it.
They have some excellent spending cuts and also have some ‘easy win’ tax changes but their plans with capital gains tax are just so unfair it beggars belief.
The other two parties have differing views.
Mr Brown, fresh from his exciting PR campaign in Rochdale is focused on maintaining growth and has a slow steady approach but with tax hikes. Mr Cameron, who doesn’t want to scare anyone but says a trip to the IMF may be possible with a hung parliament, (c’mon guys) is more focused on robust spending cuts.
Which of the two is most in line with the Lib Dems or able to align themselves and in the meantime demonstrate to the markets that they are happy to work together will be key.
Right now they will be giving nothing away as they all want an outright victory but I suspect the relevant conversations have already taken place.
Expect however, that those market makers who can, will use all they can do to create volatility where they think it’s possible.
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