Will our economy hang with our parliament?

I try to avoid writing those shrill Oh-Shit-We’re-Buggered pieces of the sort you see in the Daily Mail but I must admit, I woke up this morning and thought ‘Oh shit, we’re buggered!’

After a couple of strong coffees I realised that it’s not quite that bad, though a hung parliament isn’t an ideal outcome. It helps, of course, that the rest of the world is in a mess too. Bond prices and currency rates are all relative. Investors have to put their money somewhere. The fall in Sterling could have been worse but, thanks to Greece, the Euro is looking dodgy too and, in comparison, the pound is still a relatively safe haven.

Talking of which, if anyone else tells me that Britain is becoming like Greece I’m going to swing for them. Britain is nothing like Greece. Greece is a basket-case economy that has been over-borrowing for years and has now reached the end of the line. The UK is a relatively stable economy that has only been borrowing excessively since the banks failed and the tax base collapsed two years ago. And no, Torygraph, the European Commission did not say the UK’s finances are ‘worse than Greece’ it simply said that Britain will borrow more, relative to GDP, than Greece next year. Hardly surprising when you consider than Greece can’t borrow 12% of its GDP next year because no-one will lend it any money. In fact, the Commission’s forecast has a slightly more optimistic view of the UK economy than it did six months ago, although it comments on the lack of a detailed plan to reduce the deficit. 

The ratings agencies too seem fairly sanguine about the UK’s hung parliament. Both Moody’s and S&P said that the UK’s Aaa rating is not under threat. They seem to be assuming that whatever government the UK gets will have no choice but to make clear plans to reduce the deficit. They are right, of course. As I said last November:

Even a Lib-Con or Lib-Lab coalition will have to make definite commitments to reduce the deficit or they will be toast. 

This comment from Moody’s, via Nick Drew, sums up the new government’s dilemma:

If [the next UK Govt] were to tighten fiscal conditions too quickly, this could potentially choke off economic recovery. Alternatively, if the UK did not tighten fiscal conditions soon and credibly enough, … market opinion may move against the UK.

The rating agencies are suggesting urgent but cautious action. Like the European Commission, their main criticism of the UK has not been the lack of immediate cuts but the lack of a plan. If our new government decides not to reduce spending this financial year but publishes a clear plan for cuts over the next three years, that will probably be enough to calm things down.

Now is not the time for panic measures. Rather than rushing into gung-ho spending cuts, what we need is a considered and clearly thought through programme for reducing the deficit. It’s now looking as though some sort of Conservative and Lib-Dem coalition is the most likely outcome of the election. After this weekend’s horse-trading has finished, the politicians must get down to making that plan and showing the rest of the world that they have the will to carry it through.

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2 Responses to Will our economy hang with our parliament?

  1. Bina says:

    I fail to see why a ‘hung’ parliament should have the devastating effects you and everyone else seem to be worrying about. I thought ‘Oh Shit’ when NewLab were elected in 1997 and they started doing dreadful things to parliamentary processes that were clearly set down and regulated before they started making things up as they went along. But lo! Things did not collapse – in fact, some odd sort of boom began – all hot air of course, and now we see what the consequences of the bursting balloon is. It’s good that no crowd of ideologues is in complete control. Maybe there’ll be the chance of a little reason coming into play. (Hopes)

  2. Rick says:

    Bina – I wasn’t saying the efects would be devastating; I was saying that, all things considered, a hung parliament isn’t that bad after all. Clearly I completely failed to get that message across.

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