The paper’s political editor warned yesterday of a hung parliament. [see my “You have been warned”] Today they go further with a detailed examination of how it could all go wrong with the wearning at the end that there is no bucking the challenge of the crisis we are in and fudge through a ‘hung-parliament’ is precisely that - ‘bucking the challenge’. It would a disaster and as Warner reminds us “If the politicians don't push through the consolidation voluntarily, it will be imposed brutally by external forces”
Christina
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TELEGRAPH 19.11.09
Watch out if polls point to hung parliament
Never mind the Queen's speech, which seems largely irrelevant given the fast approaching election; British politics is about to get interesting again.
By Jeremy Warner
I don't mean of itself interesting. For close followers of the battle between ideas and personalities, politics is always fascinating, and particularly so in the run up to elections. I'm referring instead to the interest of markets, which view events not in terms of human drama but through the prism of where to invest and how to allocate capital.
After years in which the outcome of British elections made very little difference to bond and currency markets – all the major parties seemed to stand for pretty much the same thing in terms of the big numbers on tax and spend – the forthcoming campaign is looking as if it may actually matter. As a consequence, the capital markets have begun following the vagaries of the polls as obsessively as the political pundits.
For the time being, these point to a sizeable majority for David Cameron's Conservatives. Cue sighs of relief from the capital markets, for Conservative governments tend to be better at pursuing sound money policies than Labour ones. Yet the lead continues to look fragile. Nobody at central office believes the prize is in the bag. A Labour comeback seems unlikely, and certainly few would bet on it. But there is every possibility of a hung parliament and therefore a coalition government.
The general, though possibly misguided, assumption is that this would be the worst possible outcome for markets because it would lead to political paralysis and a therefore severely compromised approach to dealing with the fiscal deficit.
If the polls began to indicate such a result, still relatively benign conditions in the currency and bond markets could quite quickly turn nasty, culminating in an outright sterling crisis, currency collapse and a crippling rise in long-term interest rates.
One of the reasons gilt yields remain so tame is that markets assume that one way or another, the necessary fiscal consolidation will get done. The politicians are forgiven for being less than honest over the detail of the coming squeeze because their present priority is to win votes. Once installed in government, it is assumed they will do their duty and don the hair shirt.
That assumption could be undermined by a hung parliament. The very possibility has already got ambulance chasing hedge funds positively drooling in anticipation. What may be bad for the long-term health of the economy is a money making opportunity for the practiced hedgie.
Yet this may be one of those cases where the anticipation proves uglier than the reality. Both in Britain and abroad, coalition governments have historically been quite effective in restoring health to the public finances. Some of them have owed their very existence to a sense of national crisis that allows factional political interests to be set aside for the perceived national good.
In any hung parliament, the Liberal Democrats would presumably hold sway. The consequent "Vincification" of government, with the Liberal Democrat Treasury spokesman, Vince Cable, as Chancellor, could reasonably be judged a positive development.
Mr Cable has demonstrated a better grasp of the seriousness of the fiscal challenge than either of his counterparts, at least in terms of their public pronouncements. What's more, he has articulated a credible if contentious strategy for digging us out. Neither of his two opponents has yet provided anything as comprehensive.
The Government's strategy for dealing with the deficit was set out in the last
pre-Budget report and the last Budget. This envisages a fiscal tightening that will begin next year and mount gradually over eight years to 6.4pc of national income, or around £90bn annually in today's money, by 2017/18.
By common agreement, this is not enough. The rating agencies have said they would expect more if Britain's triple-A credit rating is to remain secure. And in any case, there's little clarity on how the Government plans to deliver this number.
Under the Fiscal Responsibility Bill announced in the Queen's speech yesterday, the Government will be obliged to set out detailed plans for halving the deficit over four years, but other than political embarrassment, there appears to be nothing by way of sanction if the plan is not adhered to.
Ridiculously, Ed Balls, the schools secretary, has already pitched in for an increase in education spending over the years ahead. The Prime Minister also seems to live in another world, where new spending commitments, not cuts, are still the order of the day. There seems to be no stomach for cuts, or even acceptance of the need for them.
Furthermore, the four-year plan envisaged for the Fiscal Responsibility Bill only gets us half way. What credibility can we attach to plans, or vague commitments, that stretch beyond the next parliament?
George Osborne, the shadow chancellor, has said he thinks the tightening should be quicker, starting next year, and has given some guidance on what he might cut, but he has been unspecific on overall size and timescale.
Mr Cable, on the other hand, is more in tune with the International Monetary Fund in believing that the Treasury has understated the problem.
He proposes an 8pc tightening over five years, though not until the recession is over. The IMF opts for 12.8pc over the next decade, and then for budgets to remain in surplus for the next 10 years to get the national debt back down to pre-crisis levels.
That might seem a consolidation so extreme as to be politically impossible, whatever the make-up of the Government, but it gives some idea of the scale of the problem.
The risk in a coalition government is that its members would be at each others' throats, both on the trade-off between tax increases and spending cuts, and on which taxes should rise and where the axe should fall on spending. With no manifesto commitments or party loyalties to hold things together, there is a danger that nothing would get done. Is it to be child benefits or pensions that get chopped? Should there be a mansions tax, or a carbon tax? Is it Gordon Brown's client state that is axed, or Trident, welfare and health? You are not going to see much agreement between Vince and George on these matters, still less between Vince and Gordon.
In the end, it won't be the politicians, still less those clowns at the credit rating agencies, that decide, but the markets. If the politicians don't push through the consolidation voluntarily, it will be imposed brutally by external forces. When politics and markets collide, there is only ever one victor.
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