Are the markets right to fear a hung parliament?

January 18, 2010

david-kuo_motley-fool.thumbnail

-David Kuo is director at The Motley Fool. The opinions expressed are his own -

There is a well-trodden saying that markets hate uncertainty. Elections are inevitably uncertain, so until the votes in the next election are counted we cannot be certain which party will govern the UK.

Currently, there are suggestions that no single party may get sufficient votes to form the next government outright. It is true that the Conservatives have a strong lead over its rivals. However, with a first-past-the post voting system, it only takes a small swing away from the Conservatives to change the complexion of the next parliament.

But let’s look at the problem facing the next government, whatever its colour. It may be blue, it may be red or it may be some combination of red and yellow or blue and yellow. That said, no government can ignore the budget deficit of £175 billion and the national debt of some £800 billion.

Politicians may like to stick their finger in their ears or bury their heads in the sand and pretend the problem does not exist until the election is over. But creditors won’t forget. Following the election, the next government knows that there will be howls of anguish and squeaking of pips when taxes are increased and public spending is slashed.

No government, a hung parliament or otherwise, can afford to ignore its creditors. The alternative is an even heftier annual interest bill. The current annual interest payment is already a whopping £40 billion and could rise further.

So, does the market have a right to fear a hung parliament?

The answer is no. Britain will need to sort out its financial mess regardless of whether George Osborne, Alistair Darling or Vince Cable takes charge of Britain’s finances. The cuts in public spending will be severe and the tax hikes will be penal.

What is uncertain is who will reside at 11 Downing Street. What is not uncertain is that whoever resides at number 11 will have to dance to the tune of gilt investors. Failing to tax and mend could result in damaging the pound, which in turn will stoke inflation and push up interest rates.

Ironically, the stock market may continue to thrive while the UK’s electorate considers where to place their “cross” on election day. For most FTSE 100 companies, what is happening outside the UK is of greater relevance given that over 80% of their profits are generated abroad. The UK’s top 100 companies earn more in both the US and Europe than in the UK.

So, by all means ponder the hue of the next government. The outcome will have an impact on our daily lives but it is unlikely to affect the markets, which are more interested in global issues.

Comments

I agree completely. Markets are global and all follow each other. Not sure what skill is involved, or are they all just lemmings?

Posted by Russell | Report as abusive
 

The only real answer to who lives at No.11 Downing Street is Vince Cable;

Alistair Darling has proven he is not strong enough to take control of the financial markets and still has no plans to claim back the bailout for the banks which could be as much as one trillion pounds; George Osborne would be even worse!

Clegg and Cables proposals for increasing the taxation of the fat cats and ultra wealthy and putting money back into the pockets of lower earners is at least a beginning of a solution.

In addition to this there are clear plans to pay back the taxpayers by increasing taxation of banks profits until their debts are paid.

 

Analysts reckon there is an 80% chance the UK will lose its AAA rating anyway. If this happens the debt will be even more difficult to pay back. Politicians probably have analyses showing the likely size(s) of the problem but there is no chance of letting the public know this side of the election as it is a 100% guaranteed vote loser. Any hung parliament must be less decisive and dither about how to implement the cuts/tax increases as there could be up to three parties ideas to take into account. It is said that the markets will react negatively to polls near the election date showing there would be a hung parliament and would not wait until the new parliament sat. Markets always react forward of results so this should be no surprise to anyone.

Posted by Derek Emery | Report as abusive
 

What really worries me is a situation where the Scottish Nationalists hold the balance of power. We have been ruled for thirteen years now by a cabal of Scots who are cleary unembarrassed by what they have done to England, while we were recently told that Scotland is the most prosperous part of the UK.They wanted devolution and they got it, so it’s time they kept their noses out of England’s business – and their hands out of our pockets.

Posted by Jane Roberts | Report as abusive
 

Charter 2010 is dedicated to seeing a hung parliament transformed into a stable and representative government which can focus on dealing with the economic crisis, the public services and the environment, undistracted by the short-term political and electoral pressures of an impending second election.

 
  •