The economic case for a hung parliament

By Jonathan Bartley
April 12, 2010

The political case is being made strongly for a hung parliament which could bring significant and much needed reform. Polls suggest that voters would prefer it to a Labour or Conservative majority government. The economic scaremongering has also been fact-checked and found wanting. There are some economic analysts now positively making the financial case:

In an article 'Would a hung Parliament be best for the UK economy?' a number of commentators suggest "yes".

Charles Stanley analyst Jeremy Batstone-Carr 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.

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.”

HT too to @@doctorcdf who points out that The Economist too has been looking at the idea, and noting that "All three parties accept the need for austerity. Of the ten largest fiscal retrenchments carried out by OECD countries since the 1970s, seven were pushed through by coalition or minority governments."

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