Can two parties work together and agree on an economic recovery package?

Posted on: 30 April 2010 by Mark O'haire

What impact will a hung parliament have on the UK economy? Independent financial advisor Peter McGahan analyses the pros and cons.

It's amazing the conversations that some parties are having around a hung parliament. I find it as exciting as an election campaign.

Whilst some are saying that fear is not a part of their manifesto they continue to preach about financial Armageddon if there is a hung parliament.

It was put to me recently that some parliamentary organisations also have funding from hedge funds and we all know how much they like volatility. A flat market creates few opportunities for them. But perhaps he was being over cynical?

In many respects a hung parliament is of little relevance as long as the government in power has clear focused plans on how to reduce debt. We can all see the impact of debt in Greece and whilst UK debt remains at this level with an ever increasing budget, a hung parliament is of no real issue in comparison.

The key to relax the markets is whether or not they believe that two parties will be able to work together to agree a working economic policy to reduce that debt.

It is perhaps very interesting that the two normal leading parties chose not to show any real detail at all regarding their policy toward reducing the debt.

The conservatives dedicated a whole 4 pages to macroeconomic policy from its 118 and there was a considerable shortage of data contained in those four pages. Mr Brown and Cameron have plans but their lack of detail is probably more about not wanting to distance themselves with the Lib Dems plans.

The UK experienced the largest increase in total debt relative to its GDP (the economy) from 2000 to 2008.The UK has the second largest highest debt to GDP of the major economies, so the focus will be clear. If two parties can work together and focus on that and show the markets some joined up thinking, the threat to the markets will be minimal.

We must remember that the threat of a hung parliament has been around for some time, and in fact its almost a guarantee, but markets have carried on regardless.

The concern about debt is that interest rates may be driven up by markets and that could be disastrous for the UK given its level of debt.

Furthermore the scale and timing of cuts are key. Too many cuts too soon could damage the GDP by taking inappropriate levels of capital out of the economy and thereby driving the economy into a downward spiral.

Too little cuts could mean upwardly spiralling debt and the potential for a drop in foreign confidence and a UK downgrade which effectively means their foreign debt would cost them much more and the downward spiral continues and really starts to get a bit Greecy.

The Lib Dems have a pretty strong plan on how to reduce the debt. In fact they are the only party with any real detail. Their plans involve a steady approach to reducing debt so as to allow the economy to be able to take it.

They have some excellent spending cuts and also have some 'easy win' tax changes but their plans with capital gains tax are just so unfair it beggars belief.

The other two parties have differing views.

Mr Brown, fresh from his exciting PR campaign in Rochdale is focused on maintaining growth and has a slow steady approach but with tax hikes. Mr Cameron, who doesn’t want to scare anyone but says a trip to the IMF may be possible with a hung parliament, (c'mon guys) is more focused on robust spending cuts.

Which of the two is most in line with the Lib Dems or able to align themselves and in the meantime demonstrate to the markets that they are happy to work together will be key.

Right now they will be giving nothing away as they all want an outright victory but I suspect the relevant conversations have already taken place.

Expect however, that those market makers who can, will use all they can do to create volatility where they think it's possible.

By Peter McGahan

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Peter McGahanPeter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.

Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.

Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'

Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.

If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email info@wwfp.net.

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