u.k. election special
TRANSCRIPT
Wednesday
April 15, 2015
www.bloombergbriefs.com
QUICKTAKE ROBERT HUTTON, BLOOMBERG NEWS
April 15, 2015 Bloomberg Brief U.K. Election Special 2
QUICKTAKE ROBERT HUTTON, BLOOMBERG NEWS
U.K., Bastion of Two-Party System, Shatters Into ManyThe nation that gave the world parliamentary democracy is poised to confront the
system’s downside. The elections on 7 May are expected to give unprecedented supportto parties focused on targeted causes — fighting immigration, protecting the environmentand winning independence for Scotland. Giving voice to disgruntled voters promises toexpand political discourse. It also threatens to produce an unruly parliament thathampers decision making in the world’s sixth-biggest economy.
Opinion polls predict no decisive winner, which would force the two main parties tocajole as many as seven smaller groups to prop up a minority government or an untidycoalition. Prime Minister David Cameron’s Conservatives and the main oppositionLabour Party are neck-and-neck at support levels of about 33 percent to 35 percent.More than a sixth of the vote will probably be split between the Greens, who promise toend welfare cuts, and the U.K. Independence Party, whose populist leader, NigelFarage, has thrilled economically marginalised parts of England by pushing for Britain toleave the European Union and stem the flow of immigrants. The Scottish National Partyis poised to win the third-biggest block of seats and emerge as a key power broker. Itsmembership took off after the defeat of the September independence referendum.
Spooked by defections, the main parties are focusing on core supporters, whichrestricts their ability to win new voters. Labour plans a “mansion tax” on the rich and isahead in some polls, though voters are having a hard time seeing its leader, EdMiliband, as a potential prime minister. The Conservatives promise to hold a referendumon leaving the EU if the party wins the election.
The U.K.’s constituency-by-constituency winner-takes-all voting system makes itdifficult for smaller parties to gain many seats in the 650-member House of Commons,though they can still upset the results for the big parties. The upstarts say they don’twant to join other parties to form a government, but instead plan to sell their support onan issue-by-issue basis. That way they can avoid the fate of the Liberal Democrats,whose backing collapsed when they joined the Tories after the last election to formBritain’s first peacetime coalition government since 1945.
Many political analysts warn that the U.K. risks ending up with a government with noclear mandate to rule, struggling to cobble together deals to get even the most minorissues through Parliament. That could make it difficult to pass unpopular measures, likespending cuts. Cameron became the first prime minister in more than 150 years to losea vote on military action when Parliament rejected a plan to bomb Syria in 2013. Theelection could end up destabilising a permanent member of the United Nations SecurityCouncil, a nuclear power and a key advocate of tough sanctions against Russia overUkraine.
CONTENTS
ELECTION GUIDESeven reasons this parliamentaryelection challenges the rule book. PAGE 3
THE POLLSBreaking down the arithmetic showshow uniquely close this election is.PAGE 4
SEAT MAPPINGAssigning vote shares to seats showsno party near the necessary 326. PAGE 5
SCOTLANDThe SNP is becoming thethird-biggest force in U.K. politics. PAGE 6
MINORITY REPORTSupport for UKIP and the Greens isunlikely to translate into many seats. PAGE 7
FISCAL GAPThe two biggest parties are £100billion apart in planned net borrowing.PAGE 8
TWO SCENARIOSA Labour government is most likely,while the Tories can hope for a surge.PAGE 9
ECONOMIC IMPACTFiscal credibility matters more for U.K.asset prices than the speed of cuts.PAGE 10
THE ODDSPunters expect the Conservatives totake more seats but Labour to govern.PAGE 11
MARKETSSterling, gilts and equities show howunsettling domestic politics can be. PAGE 12
SLOGANEERINGThe Tories appear to be winning thebattle of sound-bites. PAGE 12
ELECTION GUIDE ROBERT HUTTON, BLOOMBERG NEWS
Britain's New Multiparty Reality
April 15, 2015 Bloomberg Brief U.K. Election Special 3
ELECTION GUIDE ROBERT HUTTON, BLOOMBERG NEWS
Welcome to the Election That Challenges the Rule BookWhile the result may be up in the air,
there are some smart things to knowabout the way things will developbetween now and 7 May.
Polls Aren’t an Infallible GuideOpinion polls give a prediction of the voteeach party will get. The difficulty comes intranslating those percentages into seatsin Parliament. The U.K. elects 650members of the House of Commons, witheach seat going to the candidate with themost votes. In 2010, the Conservativesgot 36 percent of the vote and 47 percentof seats. By contrast, Labour under TonyBlair took 35 percent of the vote in 2005and garnered 55 percent of the seats.According to Anthony Wells of YouGov,even talk of error margins gives a falsesense of precision. “All we know is thatpolls aren’t precise,” he says. He quoteswhat statisticians call Twyman’s Law: “If astatistic looks interesting or unusual, it isprobably wrong.”
The Biggest Party Doesn’t Get FirstAfterShot at Forming a Government:
the inconclusive election of February1974, Conservative Prime MinisterEdward Heath, with fewer seats thanLabour, stuck it out in his Downing Streetoffice until the start of the following weekin a bid to form a coalition. In 2010, talksbetween the different parties carried on inparallel. There are no rules about howparties should seek a coalitionagreement. And there are no time limitsfor negotiations, except the next generalelection in 2020. There isn’t even a ruleabout when one prime minister shouldresign to allow another to take over.
Just Because He’s Lost, the PrimeMinister Doesn’t Have to Resign:In fact, he isn’t allowed to step down untila successor is in place. “There’s not aformal mechanism,” says Philip Norton,professor of politics at Hull University. “Hereally goes at the point where it becomesclear that the other parties’ negotiationshave reached a stage where they have amajority.” The model is 2010, when
Labour’s Gordon Brown stayed in officefor five days after losing the election,
while the Conservatives and LiberalDemocrats hammered out a deal — and Brown clung to the possibility that the LibDems might swing back Labour’s way.
It’s Not That Straightforward to Have aThe inconclusiveSecond Election:
February 1974 election was followed byanother vote in October, in which HaroldWilson’s minority Labour government wona small majority. This time around, asecond election may be harder to triggerthanks to the Fixed-Term ParliamentsAct, which requires the support oftwo-thirds of MPs for an early election. Aslightly lower hurdle is for the governmentto lose a vote of no confidence. But if thathappens, opposition parties get 14 daysto try to form a government before anelection is called. So a minoritygovernment needs the opposition’sconsent before it can call an election, andany time the governing party thinks isgood for an election is likely to be bad forthe other side.
Most Votes Doesn’t Mean Most Seats:The voting system has tended to favourLabour in recent elections. That is partlyexplained by electoral boundaries, set byan independent commission, movingmore slowly than people. Seats whereLabour does well, in inner cities anddeprived areas, often have smaller
populations. Labour has historically beenbetter at deploying its resources, winningmany seats by narrow margins ratherthan piling up votes in seats.
Smaller Parties Will Struggle to WinUKIP is averaging 13 percent inSeats:
the polls, but they’ll be disadvantaged bythe winner-takes-all voting system. Thegap between vote share and seats getsstarker the fewer votes you receivebecause your support is spread out intolots of losing piles. In 2010, the LiberalDemocrats won 23 percent of the voteand just 9 percent of the seats. That’swhy few pollsters think UKIP’s current pollrating will translate into more than sixseats. There is, though, a tipping point atwhich the electoral system suddenlyhelps smaller parties to become largerparties. The Scottish National Party mayhave reached this level: In 2010 it won sixseats, and current projections have itwinning as many as 56.
About 5 MPs Won’t Take Their Seats:Sinn Fein, the Irish republican party,refuses to recognise the right of aParliament in London to rule NorthernIreland, and so its elected members, fiveat the moment, have never taken theirseats. This reduces the number of votesneeded to get a majority to 323 or so fromthe official number of 326.
POLLS JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Source: Bloomberg/Jason Alden
April 15, 2015 Bloomberg Brief U.K. Election Special 4
POLLS JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Breaking Down the Arithmetic of a Uniquely Close ElectionThe rise of small parties in Britain
complicates the mapping of vote sharesto parliamentary seats in an electoralsystem that differs substantially from thatof the U.S. Without a big swing before the7 May election, a hung Parliament looksunavoidable. Whichever of the two mainparties gains the most seats can probablyclaim a democratic mandate — albeit aweak one — to try to form a government.With the Conservatives and Labourwhisker to whisker in the polls, it’simpossible to be confident about whichone that’ll be.
There are five main polls in the U.K.that survey on a monthly basis at aminimum. The survey methods varybetween the telephone and Internet, andefforts are made to adjust for thedemographic profile of respondents toachieve a representative draw. Somewere more accurate than others inpredicting the 2010 election outcome,though there is no particular reason forthat to be repeated this time — thevolatility of the polls just before theelection suggests their accuracy couldeasily have been by chance. Thedifferences between the polls aresummarised in a table available at http://b
.it.ly/UKPollsIn the U.S., state-by-state polling is
extensive and the sample sizes are large.It is that volume of data that facilitates thesort of analysis Nate Silver ofFiveThirtyEight.com conducted thatcorrectly predicted the 2012 electionoutcome in all 50 states. At 650, thenumber of constituencies in the U.K. is 13times the number of American stateseven though the population is just onefifth of the U.S. — it would simply be tooexpensive to poll them all.
Instead, the British are left to puzzleover the national aggregates and look tothe Ashcroft survey of marginalconstituencies as a guide to thebehaviour of swing voters. The scope forprediction errors, and thereforeelection-related market reactions, isprobably greater in the U.K. than it haslately been in the U.S.
While the polls appear to be relativelystable in a band of plus or minus twopercentage points, within it they are
volatile, thanks partly to relatively smallsample sizes. To gain a broader indicatorof sentiment, polls are typically weightedtogether — often taking a simple average.An alternative is to apply a statisticaltechnique known as PrincipalComponents Analysis that attempts toextract a common underlying signal fromthe polls. Applying that technique to theU.K.’s five most comprehensive monthlypolls and benchmarking them to the meanand standard deviation of the ComRespoll (which was not biased one way or theother in 2010) gives the results illustratedin the chart. The technique may conferonly a small advantage over the simpleaverage with differences from it rangingbetween plus or minus one percentagepoint of the vote share.
This Bloomberg Intelligence analysisputs Labour and the Conservativesvirtually tied in April. The LiberalDemocrats seem roughly to be treadingwater against a backdrop of gentlywaning support.
The Conservatives look to have madeup some ground over the past fewmonths, possibly reflecting the improvingeconomic outlook, which is important tovoters. Having been vulnerable toLabour’s “cost of living crisis” narrative,the Conservatives are benefiting from thefalling cost of oil lowering inflation andlifting real wage growth — though thelatter remains very weak by historicalstandards. Together with lower interest
rates, that has also provided a fillip to thepublic finances. The final budget of thecurrent Parliament was published on 18March and received generally positivepress coverage. Yet that seems not tohave translated into a meaningful boost tothe Conservatives or the LiberalDemocrats, based on the polls thatfollowed it.
The big change since the 2010 electionis the evaporation of Labour’s support inScotland. The independence movementhas energised the Scottish National Party,which now looks likely to claim many ofLabour’s seats north of the border. Theappointment of a new leader for ScottishLabour so far seems to have failed toreverse that trend.
The challenges of coalition governmenthave not been kind to the LiberalDemocrats, and they can expect to sheda large number of seats. A backtrack on apre-2010 election pledge to preventstudent tuition fees from rising left manysupporters feeling betrayed, and the tie-inwith the Conservatives remains toxic. Therise of UKIP has also seen Nigel Farage’sparty claim a higher proportion of theexpected vote share from the two biggestparties. While that won’t translate intomany seats, it will unevenly sap votesfrom the traditional parties — possiblytilting the balance between them in someconstituencies.
— With assistance from Niraj Shah of
Bloomberg Intelligence
SEAT COUNT JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Whisker to Whisker: Our Estimates of the Polls
April 15, 2015 Bloomberg Brief U.K. Election Special 5
SEAT COUNT JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Tight Polls Set U.K. on Course for Hung Parliament With the election just weeks away, the
polls are giving few clues as to thepossible victor. Whoever gets the mostseats probably has the strongest mandateto form a government — and that’s likelyto be a protracted process.
Polls in the U.K. are conducted at anational level, so they estimate the voteshare only. Even if the polls were 100percent correct (and they vary widely),analysts would still have to map that voteshare to seats. That task has becomemuch more complicated with themovement from what was roughly atwo-party system to one under which sixparties might reasonably be expected totake a meaningful number of seats. Thatdevelopment is prompting a wide range offorecasts among pollsters making thiselection uniquely uncertain.
Here's how a few of the main politicalanalysts expect vote shares to translateinto seats (see tables). The key thing totake from it is that under each scenariothe election outcome is a hung Parliament— no party would be anywhere near the326 number of seats required to form amajority government (or 323 excludingSinn Fein, which usually does not take itsseats).
The Bloomberg Intelligence estimatesof the vote shares can be mapped to theseat count in a relatively mechanical wayby applying the average translation frompolitical analysts between votes andseats. That would be consistent with avery narrow lead for the Conservatives,with 277 members of parliament,compared with about 270 for Labour andno more than 22 for the LiberalDemocrats — that result would probablygive the Conservatives a mandate, albeita weak one, to try and form agovernment. It is worth remembering thatsampling error and scope forseat-mapping error mean the gapbetween the two main parties is nowherenear big enough to be confident of thatoutcome. Without a big swing in the polls,uncertainty will remain elevated to thevery last.
— With assistance from Niraj Shah of
Bloomberg Intelligence
Analysts' Vote Share Predictions...
MAY2015.COM ELECTION FORECAST ELECTIONS ETC THE GUARDIAN
Conservatives 32.4 34.6 35.0 33.8
Labour 33.8 32.3 32.0 33.8
Lib Dems 8.9 13.4 10.0 7.9
UKIP 14.5 10.2 13.0 13.4
SNP 3.4
Green 4.5 3.7 5.1
Other 5.9 2.4 10.0 6.0
...And Seat Estimates
MAY2015.COM ELECTION FORECAST ELECTIONS ETC THE GUARDIAN
Conservatives 275 287 300 272
Labour 269 270 258 273
Lib Dems 26 27 20 28
UKIP 3 1 4
SNP 54 43 47 51
Green 1 1 1
Other 22 21 25 21Source: May2015.com, The Guardian.
SCOTLAND RODNEY JEFFERSON, BLOOMBERG NEWS
No Party Is Likely to Achieve an Outright Majority
April 15, 2015 Bloomberg Brief U.K. Election Special 6
SCOTLAND RODNEY JEFFERSON, BLOOMBERG NEWS
The Scottish Streets Where the Election Will Be Won or LostJohn Donnelly adjusts the hood
shielding him from the cold Glasgow rainand walks up to another house.
One of a squad of six Scottish NationalParty activists on an evening ofcampaigning in the east end of the city,he reports back to his colleagues:“Ninety-three is SNP.” The finding islogged on a soggy page on a clipboard.
While a few smiles brighten the dampnight, for Donnelly, 27, this is a seriousbusiness. His mission is to overturn half acentury of Labour dominance in Scotland,evict the party from its traditionalheartland and redraw the political map ofBritain at the general election.
“For me, this is work,” he said. “But Iwouldn’t be able to look myself in themirror if I didn’t do something.”
Six months after a referendum onindependence put politics back into pubsand living rooms, the movement thatbrought voters out in record numbers andrattled financial markets has evolved intoa mass phenomenon sweeping Scotland.
Rather than retreating after Scots votedto remain in the three-centuries-old unionwith England, the nationalists haveharnessed that radical spirit and directedit at the Parliament at Westminster. SNPmembership has quadrupled to 100,000,or one in 43 Scottish voters, and pollssuggest the surge in support will translateinto votes, placing Scotland once more atthe heart of deciding the U.K.’s fate.
“It’s unprecedented, on a differentscale,” Nicola McEwen, associate directorof the Centre on Constitutional Changeat Edinburgh University, said. “Thereferendum was never about a simple‘yes’ or ‘no.’ I just didn’t foresee how theextent to which the ‘yes’ alliancemobilised behind the SNP.”
The party’s rise is reverberating beyondScotland’s borders because polls point tothe election producing no clear winner,potentially handing the SNP a decisiverole in who governs the country whichthey are committed to splitting up.
Much of the focus in England has beenon a disaffected electorate and the rise ofthe Greens and UKIP. Yet the voting
means they will probably win nosystemmore than a handful of seats.
Polls show the SNP is ahead in at least
40 of Scotland’s 59 districts. It currentlyhas six MPs at Westminster. If the pollsare replicated on Election Day, the SNPcould become the third-biggest force inthe U.K., with Labour, which hasdominated Scottish politics for decades,the biggest casualty.
“Scotland will decide who governs theU.K.,” said Jim Murphy, leader of theScottish Labour Party. “That’s how highthe stakes are and it’s no use pretendingotherwise.” Murphy, 47, acknowledgesthe scale of the challenge. “Thesenumbers are terrible for the Labour Partyand worse for Scotland,” he said.
While the nationwide trend is foryounger voters to shun politics, the SNPis managing to resonate in a way thatechoes the “cool Britannia” phase in the1990s of Labour Prime Minister TonyBlair’s first term. The proportion ofunder-30s in the SNP has doubled to 21percent, among them campaignerDonnelly, who joined the party the dayafter voting “yes” in the referendum.
People across Scotland refer to a seachange in the country’s politics since the2010 election, when not one Scottish seatat Westminster changed hands comparedwith five years earlier. By the followingyear, the SNP had won an unprecedentedmajority in elections to the ScottishParliament in Edinburgh, paving the wayfor the independence referendum.
Defeat for the “yes" campaign shouldhave been the end of the movement.
Instead, as the pound dropped inresponse to a poll showing the "yes" sideahead in the final days of the campaign,Prime Minister David Cameron offeredScotland new financial powers in an effortto sway the vote in favour of the union.That left an opening for the SNP to exploitwith the argument that voters needed toreturn a block of SNP MPs to ensurethose powers were delivered.
Yet the legacy of the referendum runsdeeper for many.
"It totally changed my life," said PhilippaWhitford, a consultant breast-cancersurgeon who is running for the SNP inCentral Ayrshire, a district of formermining communities and more affluenttowns on the west coast that was oncethe stomping ground of Scotland’snational poet Robert Burns. It also usedto be safe Labour territory. No longer.
Whitford, 56, worked as a medic inGaza in the early 1990s, and partedcompany with Labour over its support forthe war in Iraq. She joined the SNP in thewake of the 2011 landslide and wasamong the women candidates proposedby the party after standing out during thereferendum campaign.
The dynamism the referendumproduced never petered out as peoplestarted looking toward the next election,Whitford said over tea at her home.
"After the vote, you could just feelpeople coming out of their caves andblinking in the sunlight,” she said.
MINORITY REPORT ROBERT HUTTON AND THOMAS PENNY, BLOOMBERG NEWS
The SNP's Fortunes at Westminster Look Set to Change
April 15, 2015 Bloomberg Brief U.K. Election Special 7
MINORITY REPORT ROBERT HUTTON AND THOMAS PENNY, BLOOMBERG NEWS
Surging UKIP and Greens Matter Less in Election Than They Think Supporters of UKIP and the Green
Party left their pre-election conferencesconfident they are on track to cause apolitical earthquake on 7 May and decidethe course of the next government. Theyare half right.
The advance of the two parties, fromopposite ends of the political spectrum,changes the dynamic in about a fifth ofthe 650 seats in the Parliament bythreatening to siphon off votes from thetwo main parties, the Conservatives andLabour. But as the ballots are counted,the surge is unlikely to translate into morethan a handful of seats, leaving them onthe sidelines when it comes to in anycoalition negotiations.
“There’s an expectations managementproblem,” said Matthew Goodwin,co-author of , a study Revolt on the Rightof the rise of UKIP. “Activists aremeasuring the curtains for DowningStreet, but UKIP will do well to win sixseats.”
The vote promises to be the tightestsince the 1970s, with any number ofscenarios dictating who forms the nextgovernment. The electoral system isbased on competing for individual seats,meaning vote share nationwide counts fornothing if candidates can’t win a majority.
Since 2010, when it won 3.1 percent ofthe vote and no seats, UKIP has ridden atide of anger toward the main parties overthe economy, immigration and relationswith the European Union. It now polls inthird place, with about 13 percent.
With the Greens, they account for morethan 20 percent of the vote. The Greenswon just one seat in 2010 and, despitecompeting in more than 500 in May, areunlikely to win any more. The ScottishNational Party, by contrast, might takeless than 4 percent of the U.K. nationalvote yet come away with as many as 50seats, based on recent polling.
All three have rejected being part of aformal coalition, and instead have talkedabout selling their support in parliamenton a vote-by-vote basis. At his party’selection launch on 12 February, UKIPleader Nigel Farage spoke of“campaigning” for policies rather thanpromising to deliver them, a markedcontrast from some others in his party.
“I think what we can achieve 20 or 30
seats, and hold the balance of power,”Sue Ransome, 63, from Boston, a markettown in Lincolnshire where manyimmigrants from eastern Europe havesettled, said at the UKIP conference.“That’s how we’ll make a difference.”
Nigel Jones, the party’s candidate forEastbourne, was a little less optimistic.“I’m pretty certain that we will get 10 to 12seats,” he said. “We can be one of thebrokers of power.”
There were similar voices at theGreen’s gathering in Liverpool. CarolineLucas, the party’s only MP, predicted analliance with the Scottish and Welshnationalists to drive an anti-austerity andanti-nuclear agenda.
“We can support Labour when they dothe right thing, but block them when theytry to ape the Tories,” Lucas said in herconference speech. “After this comingelection we can do far more whether wehave one Green MP or 10, we can be partof a progressive force for good.”
Should UKIP end up winning six seats,its influence is likely to matter only in verytight votes. Farage has ruled outsupporting a Labour government, and hewon’t have much to offer to Conservativeleader David Cameron.
Two of those UKIP members would belikely to be former Tories DouglasCarswell and Mark Reckless, who both
defected last year. Cameron might pointout to Farage that even when they werein the Conservatives, voting records showthey couldn’t be relied on to support theparty’s policies.
That doesn’t mean that UKIP and theGreens aren’t important. They can upsetresults in tight seats by taking votes thatother parties were counting on.
Goodwin, the author, estimates UKIPthreatens the Conservatives in about 70seats and Labour in 60. And if UKIPcomes second in a large number ofLabour seats, the party may reconsider itsposition on an EU referendum.
“The number of seats they can win isquite minor, the number of seats that theycould complicate is quite large,” AndrewRussell, professor of politics atManchester University, said. “You’ve thengot the chance to influence the agenda ofthe other parties as well.”
At the Green conference, while someactivists were realistic about their party’sprospects, others still said they believepower is in their grasp.
“Everyone’s going to be in for asurprise, we’re really going to put theother parties to shame this time,” saidJohn Devine, 65, the Green candidate inAmber Valley in the Midlands. “There areso many people out there who arestarting to look seriously at our policies.”
FISCAL GAP JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Source: Bloomberg/Jason Alden
UKIP supporters at the party's pre-election conference in Margate
April 15, 2015 Bloomberg Brief U.K. Election Special 8
FISCAL GAP JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Parties Are Running About £100 Billion ApartWith a hung Parliament in prospect, no
political party is likely to have the luxury ofgoverning alone and fully implementing itsplans. Still, ahead of the post-electionnegotiations, it is worth looking at whateach of the main parties will bring to thebargaining table.
The Conservatives have the tightestfiscal policy. The Labour Party seems tohave the flexibility to meet its policyobjectives and, at the same time, endausterity (if defined as real-term spendingcuts), while the Liberal Democrats havecut a path down the middle.
In any event, borrowing in the nextParliament is likely to be higher than wasprojected in the Conservative and LibDem coalition’s March 2015 budgetstatement. The spending cuts as currentlyplanned by the Conservatives aresignificant, especially given how muchthey have cut already. The two biggestparties may be about £100 billion apart interms of borrowing plans by the end ofthe next Parliament.
For a table of Bloomberg Intelligence'sinterpretation of how each of the parties'policies would affect public-sector netborrowing, see .http://bit.ly/UKbudgets
ConservativesThe Conservatives in these calculations
are assumed to borrow a bit more overthe next few years as NHS spendingramps up to an extra £8 billion in today'smoney. That erodes the overall borrowingsurplus at the end of the next Parliament.These plans suffer from a credibilityissue: very sharp spending cuts in2016/17 and 2017/18, before reversallater on. It doesn’t help that theConservatives haven’t said anythingabout how those cuts would be achieved,despite having access to the machinery ofgovernment.
LabourWe assume that a Labour government
holds spending constant in real termsbeyond 2015/16 for the NHS but tops thatup with £2.5 billion extra a year, and alsothat education spending is flat in real
terms and spending on internationaldevelopment is constant as a share ofnational income. It’s also assumed thatLabour would cut real departmentalspending in unprotected departmentsevery year until the current structuraldeficit is eliminated — the party hasstated publicly that it would do so.
Compared with the policy path assumedfor the Conservatives, the Labourscenario would see the Treasury issueabout £101 billion more in debt over thenext Parliament, leaving debt 4.6percentage points higher as a ratio toGDP by the end of it.
The figures here depend on Labourcutting unprotected departmentalspending by 1 percent a year in realterms after 2015/16. Deeper annual cutsof 1.5 percent would see the structuraldeficit eliminated a year earlier andcumulative borrowing would be lower.
Liberal DemocratsThe Lib Dems are assumed to follow
the policies laid out in the “yellow book”delivered to Parliament after the officialcoalition budget. Again, the extraspending means more borrowing. Incumulative terms, over the nextparliament, the Lib Dems would borrowabout £53 billion more than the coalition'sbaseline, £29 billion more than the
Conservatives and about £72 billion lessthan Labour.
Fiscal OutlookThere are very significant differences
between the main political parties’economic and fiscal plans. The coalition’sbudget baseline policy is probably so tightand concentrated on relatively fewgovernment departments that theeconomy would struggle to make therequired adjustments without disruption.
The Conservatives’ plans are thetightest of the three main parties andconsequently deliver the fastest reductionin the debt-to-GDP ratio. The policy mixmeans the squeeze on departmentalspending should be achievable, but itcomes with risks, and the absence ofdetail is a significant concern.
Labour’s plans are the least onerous,with departmental spending flat in realterms by the end of the next parliament.That still represents a squeeze on servicedelivery since the population is expandingand aging. The price is more borrowing,though debt would still fall as a share ofGDP over the next parliament.
The Lib Dems' policies would also seemore borrowing, cutting a path betweenthe Conservatives and Labour. Thatleaves them in a good place to negotiateas part of a new coalition government.
SCENARIOS JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
How the Parties' Debt-Reduction Plans Compare
April 15, 2015 Bloomberg Brief U.K. Election Special 9
SCENARIOS JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Two Main Scenarios of How the Election May Play OutAbsent a big swing at the ballot box,
whatever government emerges from thepolitical fog will depend on some degreeof cross-party cooperation — that factalone should protect the U.K. economyfrom the worst outcomes.
The politics of this election are uniquelycomplicated by the rise of the ScottishNational Party, which is likely to take asignificant number of Labour seats inScotland and prevent it gaining an overallvictory in the wider U.K.
For the purposes of assessing theeffects of different governments on theeconomy there are a couple of mainscenarios worth considering.
Labour Minority GovernmentIf the seat count comes in as page 5
illustrates, the formation of a minorityLabour government supported by theScottish National Party and possibly theLib Dems is the most likely outcome.However, the route to it could be a bumpyone. First up, the Conservatives wouldprobably have the most seats inparliament and a mandate to try and forma government. With just 277 seats, theTories would be miles short of a majorityand, even with Lib Dem and DemocraticUnionist Party support, would fall short ofone that is workable because theopposition parties could carry a vote of noconfidence.
There might reasonably be questionsover whether Labour can justify forming agovernment having taken fewer seatsthan the Tories. But the fact is that themandate for a centre-left progressivegovernment would be strong. Labour,SNP and Lib Dem policies (beyondScottish independence) are all in thesame ball park and together the partieswould take the most seats and accountfor the highest share of the vote by adecent margin.
With the SNP campaigning to split upthe U.K., it would not be acceptable forthe party to hold any ministerial positions— an official coalition government hasalready been ruled out by both parties.
Instead, the SNP would agree to supportLabour to prevent other parties bringingdown the government with confidencevotes and make sure it is able to get itsBudget statements through parliament —this is known as a confidence and supplyarrangement. The Lib Dems couldprobably be persuaded to do the samebut there is little reason for Labour to offerany ministerial positions. Under thisscenario, the House of Commons wouldlook like the chart above.
Policywise, the SNP wants to end the"austerity politics of the Westminsterestablishment" and Labour could meet itsfiscal objectives without any real-termreductions in overall governmentspending — though some unprotecteddepartments would experience cuts. TheU.K.’s position in Europe would be safe,since neither party wants a referendumon EU membership. That the SNP coulddemand another referendum on Scottishindependence as the cost for its supportfurther down the line would present asignificant challenge to the longevity of agovernment of this form.
Conservative Minority GovernmentOn present polling, the Conservatives
would not have anywhere near enoughseats to command a majority. However, a
significant prediction error or shift in thepolls to consistently above 36 percent ofthe vote share could see the party win300 seats. It would still need support fromother parties, potentially the Lib Demsand the DUP.
It’s likely that the Tories and Lib Demswould meet in the middle in terms ofpolicy — smaller departmental spendingcuts and slower deficit reduction, but stilltight fiscal policy overall.
On Europe, neither the Conservativeleadership nor the Lib Dems want to seethe U.K. leave the EU. It’s possible,therefore, that Lib Dems could demandabandonment on the referendum as theprice of its support. The risk is thatanti-EU sentiment continues to festeramong Tory backbenchers. Given theslim margin of seats, they would havemore power. That is the single biggestrisk to Conservative party cohesion andthus the longevity of a Tory minoritygovernment.
Wild CardsOther scenarios include a significant
swing in the polls to produce a majorityConservative or (less likely) Labourgovernment — or a 'nobody wins'scenario, even after negotiations, thatwould trigger new elections.
ECONOMIC IMPACT JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
How a Labour Minority Government Might Look
April 15, 2015 Bloomberg Brief U.K. Election Special 10
ECONOMIC IMPACT JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Fiscal Credibility Is the Biggest Risk for U.K. PartiesThe fiscal plans of all three major
parties are consistent with medium-termdeficit reduction and falling debt relativeto the incomes that service it. It’s thecredibility of those plans that is crucial indetermining the premium paid on Britishdebt, and the speed of fiscal consolidationis probably far less important.
The 2010 general election is a goodexample. Again, it was a close one (ahung parliament was in prospect) and theparties were thought to be some distanceapart on the scale of fiscal consolidationplans. If the party in power matteredmuch, movements in the cost of Britishdebt over that period could have beenexpected. Indeed, British 10-yearborrowing costs fell from about 4.1percent at the beginning of 2010 (whenthe Labour Party might have beenexpected to win) to less than 3 percent byAugust of the same year (some time afterthe Conservative-led coalition’semergency budget).
Some might be tempted to attribute thefall in borrowing costs to the changingpolitical landscape, but that would bewrong. Rather than a fall in the gilt riskpremium, the decline in 10-yearborrowing costs can be explained almostentirely by lower expectations for policyrates, as the chart illustrates. What’smore, the same movement in rates wasexperienced in the U.S., indicating asubstantial global influence. All elseequal, politics could have had an effect ofabout 0.2 percentage point on 10-year giltyields, but that’s probably anoverstatement of the election’s impact.
Fiscal Policy EffectsWhile the political party that comes to
power is unlikely to have a significantdirect influence on government borrowingcosts, its fiscal policy stance may have anindirect influence via monetary policy. Thesize of the fiscal consolidation has adirect read across to the degree of
monetary activism required to stabilisedemand in the U.K. economy. Indeed,one of the reasons monetary policy iscurrently so loose in the U.K. is that asizable consolidation is in prospect for thenext Parliament.
The difference between the fiscalpolicies of a Labour minority government— assuming it gives no ground to theScottish National Party on scaling backausterity — and a Conservative minoritygovernment could be significant. Becausefiscal consolidation leeches demand fromthe economy, there would be more ofoffset needed from monetary policy tokeep the economy on a stable growthpath under the Conservatives. Thatmeans a lower path for policy rates andsterling.
The EU ReferendumAbove all it is crucial to recognise that
the probability of a U.K. exit from theEuropean Union is extremely low — thisis what stands between the generalelection and significant U.K.-centricmarket volatility.
The reasons for that are several:
First, whoever forms a government isvery likely to depend upon the support ofat least one party that doesn’t want tohold a referendum and may demand itsabandonment as a price for support. Itwould only be if the Conservatives won amajority that a referendum would beassured — as mentioned earlier, the oddsof that are slim.
Second, even if a referendum ispledged, whether senior Conservativeleadership campaigns to stay in the uniondepends on what concessions can benegotiated with other Europeangovernments — since neither PrimeMinister David Cameron nor Chancellor ofthe Exchequer George Osborne wants toleave, the bar would be low.
Third, even if a referendum is held andthe Conservatives campaign to leave,public support for staying has rarely beenhigher — 45 percent want to stay, withjust 35 percent voting to leave. Since itwould take time for opinion to shift in thatdirection, a more meaningfulEurope-related market reaction mightmore realistically be expected to come along while after the election itself.
THE ODDS PAUL SMITH, BLOOMBERG BRIEF EDITOR
Decline in Yields in 2010 Largely Due to Lower Global Rates
April 15, 2015 Bloomberg Brief U.K. Election Special 11
THE ODDS PAUL SMITH, BLOOMBERG BRIEF EDITOR
Punters Give Overall Majority Less Than 15% ChanceThe Conservatives will win the most seats but fall short of an absolute majority, leaving Labour to take power as a minority government.That's the emergent view of gamblers on Betfair Group's exchange, which pits punters against one another.
The Steady Ascent to a Hung Parliament Tories Predicted to Win Most Seats, But...
The chances of a majority are evaporating. The probability of ahung Parliament has risen to 87 percent, according to Betfair. ATory majority is priced at 11.5 percent and the likelihood of anoutright Labour win is just 2 percent.
The Tories are comfortably winning the race for most seats,according to Betfair punters. The Conservative Party has a 64percent chance of outnumbering its rivals; Labour is languishingon 36 percent.
…Labour Most Likely to Form a Minority Government
Here's where it gets really interesting. Despite the remote likelihood of Labour winning an outright majority (remember, just 2 percent), aLabour minority is the most likely government at 33 percent, according to the odds. This chimes with recent polls and BloombergIntelligence . A Tory minority is the second-most probable outcome at 26 percent, followed by a Conservative majority at 11.8analysispercent. The chances of a repeat of the Conservative-Liberal Democrat coalition? Just 8.7 percent. (Note: The probabilities are calculated as the reciprocal of mid-prices between back and lay odds. The charts show odds to 8 April. Thechances cited in the captions are based on Betfair mid-prices as of 14 April).
OPINION
April 15, 2015 Bloomberg Brief U.K. Election Special 12
OPINION
Election Fracture Starting to Spook Investors, BLOOMBERG VIEW COLUMNIST BY MARK GILBERT
The most exciting/divisive/unpredictable (take your pick)election in decades is finally starting to ping the risk radar of theglobal investment community. The prospect of a hungParliament, with neither Labour nor the Conservatives winningenough seats to form a government, and both reluctant to co-opta smaller party into a full coalition, is making investors wary ofowning U.K. assets.
The distress is most evident in the currency market, where thepound has fallen to its weakest in five years against the dollar, asthe first chart illustrates.
The government bond market is also showing signs of stress.The gap between what investors charge the U.K. government toborrow for a decade versus how much they charge Germany hasbeen widening in recent weeks. Gilt yields have edged higherwhile German bund yields continue their descent toward zero.
Some of that move is due to what's happening in the eurozone, where the European Central Bank is making good on itspledge to buy 60 billion euros ($64 billion) of government debteach month, driving yields lower. But foreign investors dumped anet £14 billion of U.K. government debt in January and February,suggesting overseas distaste for gilts is also playing its part inwidening the borrowing gap against Germany.
The equity market isn't unscathed by political concerns. Thebenchmark European stock market index, the Stoxx Europe 600,has outpaced the U.K.'s FTSE 350 index by 2.46 percent sincethe gilt market started to take fright on 25 March. On anannualized basis, that means U.K. stocks are delivering less thana third of the return investors have achieved in Europeanequities.
The market moves provide a timely reminder that domesticpolitics can be just as unsettling for financial markets asgeopolitical ructions, albeit on a more parochial basis.
Conservatives Beat Labour in Battle of the SlogansBY PAUL SMITH, BLOOMBERG BRIEF EDITOR
In one of his more lucid moments, frontman JimDoorsMorrison said, "whoever controls the media, controls the mind."Apply this rockstar aphorism to the election and David Cameron'sConservative Party should comfortably beat Ed Miliband's LabourParty on 7 May.
In the battle of the slogans the Tories' "long-term economicplan" appears in almost five times as many news articles inMarch than Labour's choice shibboleth, "cost of living crisis."(The story counts are derived from Bloomberg's News Trendsfunction that searches through articles from more than 100different news sources.)
A simplistic analysis, perhaps, but this peddling of sound-bitesby the Fourth Estate may support the assertion of SimonWren-Lewis that the U.K. media has a distorted and biased viewof economic policy. Wren-Lewis, an economics professor atOxford University, has dubbed this . He contendsmediamacrothat the media are more obsessed with the budget deficit thanholding the governments' policy of austerity to account.
Still, while the Conservatives seem likely to win more seatsthan Labour, they are unlikely to break on through to the otherside of the 326-seat threshold required for an absolute majority.
CONTACTS
Pound Suffers Election Fever
Political Risk Is Rising
Riders on the Media Storm
April 15, 2015 Bloomberg Brief U.K. Election Special 13
CONTACTSBloomberg Briefs
Managing Editor
Jennifer Rossa
+1-212-617-8074
London Brief Editor
Ainsley Thomson
Economics Brief Editors
Paul Smith
Scott Johnson
Alex Brittain
Designer
Pekka Aalto
Business Manager
Nick Ferris
Bloomberg Intelligence
Chief Economist
Michael McDonough
Chief EMEA Economist
Jamie Murray
Bloomberg Economist
Niraj Shah
Bloomberg News
London Bureau Chief
Emma Ross-Thomas
Quicktakes Editor-at-Large
Leah Harrison