Hung parliaments and economic crises

by Ed Bowsher on 23 April 2010  |  4 comments
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Would a hung parliament inevitably lead to an economic crisis?

So many people including Kenneth Clarke and the Daily Telegraph are arguing that a hung parliament would be bad for the economy.

But is this really true?

The first point is that governments with big majorities are sometimes hit by economic crises. 1967 is a good example. Prime Minister Harold Wilson had soundly beaten the Tories a year earler, but his Chancellor, Jim Callaghan, was forced to devalue the pound nonetheless. Clement Atlee's government also had problems with Sterling in the late 40s even though Labour had a decent majority.

Even John Major had a decent working majority when 'Black Wednesday' happened in September 1992. It was only after that crisis that he lost authority. It sometimes seemed that Major was leading a minority government, but he still had a majority - at least on paper.

Secondly, minority governments and coalitions have been able to make tough economic decisions. The 1931 'National Government' coalition introduced brutal cuts - far too brutal in fact - but no one can accuse that government of being soft.

And look what happened in 1976 after the IMF bailout. At the previous election Labour had won a slim majority which was whittled away by by-election losses over the parliament. Eventually Labour was forced to do a deal with the Liberals in 1977. But in spite of the government's precarious parliamentary position, Prime Minister Callaghan was still able to begin the shift to 'tough-love' monetarism with his 'you can't spend your way out of recession' speech in 1976.

So I'd argue the historical picture is a bit more complicated than some people would have you believe.

Looking ahead

There's no question that the public finances are in a mess and there's a good chance that gilt yields and long-term interest rates will rise over the next couple of years. I suspect that this will happen whoever is in power.

It's also possible that markets could lose confidence in the UK at some point and the pound could tumble. If Sterling fell fast enough, that would be seen as a crisis. The worst case scenario is that the UK could get in a mess similar to Greece.

However, although we might have a mini-crisis, I'll be very surprised if we get to a Greece-style scenario. That's because the UK government doesn't have to repay most of its debt in the near future - unlike Greece - so it's highly unlikely that we'll get to a situation where the UK will have to default (i.e not pay back all its debt.)  It's the prospect of default that scares markets above all else and I think that deep down, most market players know that a UK default is very unlikely.

So, not a Greece-style crisis, but might a hung parliament provoke a scary wobble?

Yes, it might. If there's no clear winner on May 7th, the pound could fall quickly. You probably wouldn't get that quick fall if the Tories had won a majority - although the pound could still fall over the medium term.

But with a hung parliament, I reckon that, at worst, this would be a wobble that would last for a few weeks. If we have a coalition, Vince Cable would probably be a senior figure in the government and we know that he has been pushing hard for debt reduction in recent years (even if the Lib Dem policy of raising the income tax threshold to 10,000 pounds is a bit silly.)

A hung parliament would be a big opportunity for the Lib Dems and they're not going to want to fluff that opening by gaining a reputation for economic incompetence. Clegg & Cable will support public spending cuts in 2011 and beyond.

So I'm not losing any sleep about the prospect of a hung parliament. And anyway, most British people are fed up with being pushed around the City. If the British people want a coalition government, then they should have one. The people should run the UK, not a bunch of overpaid bankers in the City and Canary Wharf.