The Conservatives have this week argued that a hung parliament will lead to economic Armageddon. But the markets are already comfortable with the idea.
UPDATE 16.32: Ken Clarke has today repeated his claims made earlier this week that a hung parliament could result in the IMF being called in.
The Conservatives have this week argued that a hung parliament will lead to economic Armageddon for the UK. The reality is that the markets are already comfortable with the idea.
On Wednesday, George Osborne warned that “the only time the IMF has come in was when there was a hung Parliament”, and earlier that day Ken Clarke suggested that without a clear winner, “sterling will wobble”.
Raising the spectre of an IMF bail-out and scaremongering about a sterling crisis is, in terms both might understand, pretty poor form. Firstly, talking down the economy purely for political gain is not particularly admirable, but more importantly, these comments display a basic misunderstanding of how markets work.
The idea that global investors are going to wait till May 6 to price in the risk that no party emerges with a clear majority is ridiculous. As Goldman Sachs argued this week in a note advising clients to buy sterling (not necessarily the most popular of institutions, but undoubtedly still one of the most financially astute), markets are already “comfortable” with the idea of a hung parliament – it is ‘priced in’.
Indeed the possibility of coalition government has been around for weeks, and is becoming increasingly likely with each poll. But in the last month the pound has strengthened against both the dollar and the euro, suggesting that the prospect does not strike fear in the hearts of investors, who – international in nature – are rather used to coalition governments anyway.
Of course no one can predict what might happen on the day, and there is little doubt that days of political horse-trading without resolution will lead to serious pressure on gilt yields and the currency. Uncertainty is never a good thing. But the crucial point to make is that there is clear consensus across all parties that the deficit must be reduced, and that this will require severe and painful cuts to government spending. Markets appreciate this. There remain disagreements, particularly around the timing of cuts and the use of tax in the process. But fundamentally, on the basis of all three manifestos, no matter what the government looks like after the election, public finances will be sorted out one way or another.
Indeed Moody’s, one of the two most important ratings agencies, have suggested that a coalition government may actually help politicians deal with the deficit, providing a broader base of support for the difficult policy decisions that will have to be made. A government backed not by 30 per cent of the electorate but by 50 per cent or 60 per cent clearly has a stronger mandate to act.
Further, we should not forget the importance of monetary policy. In the UK it remains unprecedentedly loose, which should continue to support economic growth and, if you believe Conservative economic theory, is the more important tool in the policy toolbox anyway. As long as the incoming government doesn’t pull the rug from under the recovery by removing government support too quickly (and let’s be clear, anyone who argues that government support does not currently have a crucial role in the economy is a fool), growth should continue its gradual upward trajectory, meaning the deficit and debt to GDP ratios should not balloon. This should secure our AAA rating for a period, by which time we can hope that the politicians should have put petty politics aside and made some decisions.
The mere occurrence of a hung parliament will not wreck the economy. Senior politicians disingenuously arguing that it will, on the basis that they will simply refuse to play with anyone else regardless of the potential impact on the country, might.Like this article? Sign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by making a donation today.
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