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Categories:Politics,Regulation

Would a hung Parliament be best for the UK economy?

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Much of the economic commentary over the last three months has warned that a hung Parliament in the UK would be a disaster for a nation with a deficit of 11.4 per cent of GDP - but would it be the worst case scenario?

The nation’s finance experts have been split as to what direction the UK should be moving with regard to managing the economy - in February, 20 leading economists called for immediate action preferred by the Conservative party while 60 of their peers called for a protracted austerity package, preferred by Labour.

But the fears are that if the polls are correct, no one party could take control without a majority in Parliament, creating a hung Parliament. Experts fear that this would lead to economic and ideological wrangling within a coalition Government or would lead to a delay in implementing a debt strategy should another election have to be called soon after May by a minority Government.

Both extreme but possible scenarios would spook investors into avoiding a UK without definite plans to reduce the deficit.

Deutsche Bank strategist Jim Reid says: “We suspect the biggest risk to the UK’s rating would be in the event of a hung parliament that fails to produce a Government commanding sufficient confidence within the House of Commons.

“Without party political agreement this scenario would mean that no credible plan would be put forward to reduce the deficit, raising the risk of the UK losing its AAA sovereign rating. Gilt yields could rise sharply as a result, which in turn would be negative for risky assets. Risk premiums could increase and we would likely see higher yields, steeper slopes, higher breakevens and higher implied volatilities.”

But is this necessarily true? Would the UK suffer so acutely without a majority Government?

“A minority Government may have greater leeway to assemble a credible deficit reduction plan than one that is encumbered by expensive pre-election promises.”

Simon Hayes, BarCap

While Charles Stanley analyst Jeremy Batstone-Carr stresses that the firm does not necessarily agree with the sentiment, he says there is some compelling evidence to suggest a hung Parliament may not spell disaster.

He notes that the independent Bank of England is not affected by Westminster. He also notes that around 76 per cent of FTSE 100 revenues are derived from abroad, meaning the UK’s benchmark “blue chip” index tends to be more closely correlated with the performance of international markets than purely domestic affairs.

Batstone-Carr also says that recent Governments have appreciated the power of the markets: “Politicians of all colours are now much more cognisant of the relationship that exists between policy and the markets and the markets’ responses which then inform the feedback loop to policy,” he says.

Charles Stanley and Morgan Stanley also both agree that despite all major parties’ perceived political difference, the economic policies of the two major parties at are not markedly different.

Morgan Stanley economist Melanie Baker says: “The ultimate policy outcomes may not look that different, particularly with all major parties committed to significant deficit reduction and the market itself likely to act as a disciplining force against inaction.”

Baker notes that a lack of a majority government in other countries does not always hinder decision-making, but she also notes that any adverse reaction by the markets to a hung Parliament may force all the parties into taking action to reduce the deficit.

“The ultimate policy outcomes may not look that different, particularly with all major parties committed to significant deficit reduction.”

Melanie Baker, Morgan Stanley

Barclays Capital analyst Simon Hayes also thinks a hung Parliament might be a blessing for the UK economy. He says: “In the absence of an outright victory for Labour an emergency Budget seems likely. If this involves more than one party, then presumably all pre-election commitments are up for potential amendment or abandonment.

“A minority Government may have greater leeway to assemble a credible deficit reduction plan than one that is encumbered by expensive pre-election promises.”

So would a hung Parliament be our best bet? Could the parties come together and plan a package that would successfully tackle the crippling deficit? Tell us your thoughts.

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Readers' comments (2)

  • One of the positive outcomes of a hung parliament may be that Vince Cable would be able to genuinely influence decisions -- and he speaks a lot more economic sense than the other two...

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  • Can we afford the quantity of rope required?

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