Thursday, 22 April 2010

Does a Hung Parliament matter?

I've thought for many months - well before the boost in Lib Dem support in the polls - that a hung Parliament is the most likely result of this election simply because of the enormous extra number of votes the Conservatives need to get seats, and that a Lib/Lab grouping is the most likely outcome.

Does this matter?

Well, yes, if you don't agree with Lib/Lab policies but I was really thinking of the economy rather than the whole suite of Government policy.

This thought was prompted by a meeting today with the local bank manager about one of the local groups I'm involved with. (I say local - he is based in Gateshead, but at least he's not been outsourced to India). His view, with which I agree, is that many people and firms have not been significantly impacted by the economic troubles because interest rates are at very low levels (he did accept there is a problem getting new credit, to small firms in particular, but issue of the supply of new credit is less important than interest rates on existing credit).

If interest rates go up a lot before the economy is in good shape then many firms and people will have a hard time meeting interest payments. There will be defaults, bad debts, bankruptcies and even more unemployment. (Have I mentioned before that every Labour Government has left office with more unemployed people than when it came in?). For that reason the Bank of England is under real pressure to keep interest rates low.

So what would make the Bank of England increase rates? Two things - increasing inflation and problems selling Government debt. The latter could be affected by a hung Parliament. And badly. Prices in markets of all types are about confidence. If investors think that the UK Government will not get a grip on public finances then they will not buy Government debt unless there was a big increase in the interest rate.

And the problem of a hung Parliament is that it will take time for the Parties to agree who is in charge and then to agree what action will be taken on cutting the deficit. And then there is more likley to be tension and difficulty in implementing the cuts. This will increase uncertainty. And uncertainty will also prevent investors from buying - why should they, when the outcome is uncertain.

I have read a ludicrous comment that a hung parliament would lead to Vince Cable being Chancellor - or at least heavily involved in economic policy, and that would be a good thing. Cable is not credible internationally or in financial markets; he is a good presenter but has shown no consistency. This is starting to be found out.

If the Parties resolve a hung Parliament quickly and reach a quick conclusion on responsibilities and areas of focus for cuts, then the uncertainty will be lessened and interest rates may not have to rise quickly. But if there are delays, tensions and a lack of clarity then we will not be able to fund our massive deficit. And interest rates will have to rise too soon, causing big problems.

In other words: it is possible that a hung Parliament will not cause immediate economic problems. But it certainly could, and that is one important reason why we should hope for a clear outcome on May 7th.

I think there are others, and if I have time I'll write about them later. But first I should comment on the second leaders debate; like the first, I preferred to go to the pub quiz (which once more we did not win) but I've seen enough other people's comments to have a go myself.

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