There are now only weeks to go until the General Election, which – by common consent – will be the most closely fought and difficult to predict in a generation. Since only last week, a dozen opinion polls have been published and not one of them has made forecasting the likely outcome on May 7th any easier.
All of which has made one thing certain: the crude percentages beloved of the traditional opinion polls will be almost meaningless in this election. There will be variations from constituency to constituency and tactical voting will play a far greater role than it has ever done. To take just one example – will Conservatives in Sheffield Hallam, knowing they are unlikely to win, vote for Nick Clegg to thwart a potential gain for Labour?
This uncertainty will be replicated across the country. Throw in the Scottish Nationalist Party (SNP) – and their apparent determination to ‘lock the Tories out of Downing Street’ – and the permutations become many and various. The arithmetic does not make comfortable reading for those who like certainty. According to Lord Ashcroft’s latest polling (the most detailed I can find), Conservatives plus Liberal Democrats currently equal 314: Labour plus the SNP equals 313. Both fall short of the 326 needed for a working majority.
The uncertainty is likely to continue right up until Polling Day. ‘No overall majority’ seems the inevitable verdict of the exit polls: the question is, will anyone be able to put a workable coalition or agreement together?
When the dust finally settles, though – and that may not be for a few days after the election – we are likely to see one of four possible outcomes:
- A Conservative minority government
- A Conservative led coalition
- A minority Labour government – presumably reliant on the SNP for working support
- A Labour led coalition – which on current figures would need to include the SNP, Plaid Cymru, the Greens and possibly Sinn Fein and the SDLP as well. Alternatively, a sudden upsurge in Labour support could pave the way for a Labour/Lib Dem coalition.
What economic policies are likely to result from these possible outcomes? Here are our very tentative suggestions at what may happen:
Conservative minority / Conservative led coalition
When David Cameron and George Osborne have appeared on TV throughout the election campaign, their message – almost a mantra – has been simple: “The plan is working. Britain is recovering: don’t let Labour wreck it.” And as the Chancellor has frequently stressed in his Autumn Statement and Budget speeches, there has been some remarkably good economic news since the dark days of 2010. Britain has recovered quickly from the recession, and the numbers compare well with all our major competitors.
So the return of David Cameron to Downing Street will see a continuation of the current economic policies which would certainly give confidence to the markets. In the Budget, the Chancellor laid out a plan to eradicate the deficit by 2018/19, claiming that the country can only afford to invest in areas like the NHS if it is underpinned by a strong and competitive economy (with the Chancellor making an extra £8bn a year pledge to the NHS in Saturday morning’s papers).
How quickly the Chancellor is able to march down his chosen path depends on the make-up of the Commons. If the Conservatives are close to a majority then it will be ‘business as usual’, with policies continuing very much as at present. A coalition – presumably with the Liberal Democrats again – might see the pace of austerity slacken: but there have been plenty of major changes over the lifetime of this parliament. It’s easy to forget that when the Coalition came to power, the basic personal allowance was £6,500 and that the pension system has been radically transformed in the last year.
What of a minority Conservative government? That’s when it becomes complicated. You are going to hear the phrase ‘confidence and supply’ a lot over the coming weeks: a minority government needing to rely on the support of other parties in motions of confidence and appropriation (supply). This would mean that almost every important measure was subject to individual negotiation and horse-trading: it would certainly suggest that some of the Chancellor’s plans couldn’t be put into practice without major concessions being made in other areas.
Labour minority / Labour led coalition
If Ed Miliband is to walk through the front door of 10 Downing Street, he’s most likely to do it as the leader of a minority government backed by the SNP, or in a formal coalition with Nicola Sturgeon’s party. Whatever your feelings about a party obtaining less than 50% of the vote in Scotland quite possibly deciding the Government of the UK, the SNP are going to be pivotal in this election – especially to a Labour Government.
The SNP demands for an end to austerity, a removal of the benefits cap and for a commitment to ‘progressive’ policies are well known. So what might we see in the Budget of Chancellor, Ed Balls?
Writing in the Spectator last week, John O’Neil suggested that there would be ‘tax rises to suit every taste. But the people he’s expecting to pay [for it all] will probably just leave.’ Tax rises would seem inevitable, especially if the Labour Government is reliant on SNP support.
The top rate of tax is likely to go up to 50p in the pound: add on the extra 2p National Insurance and Britain will have an effective top rate of 52%. Balls has hinted that this may be a temporary measure – in which case the fabled ‘top one per cent’ (who pay around a quarter of all income tax) will simply defer their bonuses. If it’s a permanent measure, they may simply leave the UK.
Corporation tax is likely to go up by 1% to 21% – the first rise since 1973. The Centre for Policy Studies estimate that even this small rise would cost just under 100,000 jobs in the next parliament.
The mansion tax would be introduced on homes worth more than £2m. Ed Balls is apparently looking for £1.2bn a year from approximately 100,000 homes – suggesting an average bill of £12,000 a year.
There’ll certainly be a bankers’ bonus tax and it now looks like ‘non-dom’ status will be abolished – despite Ed Balls saying in January that this ‘would probably cost the country money.’
These measures look fairly certain. We might also see a government-created high street bank and the re-introduction of the 10p rate of tax. Depending on the arithmetic dictating the make-up of the Government, there could be further ‘progressive’ policies and taxation. Sunday’s papers were suggesting ‘emergency measures’ to raise £7.5bn a year by clamping down on tax avoidance and evasion.
That, then, is what we might see from our next Government. Of course, the polls could be wrong. We could wake up on May 8th and found a majority Conservative or Labour Government firmly in place. In that case, the policies would proceed as described above, but with the absolute certainty that they’d be in place for five years under the Fixed Term Parliament Act.
But if we have a minority government, could it survive for five years? There are considerable doubts. Don’t discount the possibility of another election later this year or early next year. After all, Britain’s last minority Government was the first Labour administration of Ramsay MacDonald. It lasted from January to November 1924.
What of the markets?
There is no doubt at all that financial markets are worried about the possibility of a deal between Labour and the SNP which could ultimately lead to the break-up of the UK – or even the transfer of significant fiscal powers to Scotland. Credit Suisse has already warned that this will be the worst possible outcome for UK Bond markets. The currency markets are also unsettled at the moment. On Friday 10th, the pound fell to $1.45 at one point which is the lowest level since the uncertainty immediately after the 2010 election. As the Guardian commented, investors were struggling “to assess the tax and spending implications of a range of outcomes, from a minority Labour government to another Conservative coalition.”
And yet on the same day, the FTSE 100 index closed at an all time high. Having started April at 6,773 the market closed at 7,089 on April 10th – up 4.6% on the month. Markets are supposed to dislike uncertainty: the foreign exchanges certainly did, yet the stock market seemed quite happy. Saturday’s Grand National was more predictable…
Conclusions
What you believe about the outcome of the Election and the future for the UK economy probably depends on your political standpoint, but there is no doubt that the next three weeks – and the inevitable machinations which follow – will be interesting, to put it mildly. The same goes for the rest of the year: given the make-up of the House of Commons, the fixed term parliament act may simply prove unworkable. And whichever party is in power will still be buffeted by world events. The economic worries in Europe and the tensions in the Ukraine are not going to go away just because the UK has had a general election.
We can, however, say one thing for certain. Whatever happens in the next few weeks and months, we will keep you informed. We’ll always be ready to answer your questions, so don’t hesitate to get in touch. More than ever, this will be the year when clients and advisers will need to keep in regular contact.
In Bob Dylan’s words, “The times, they are a-changin…’” Rest assured that our commitment to our clients will not be changing.
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