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U.k. Election Special

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Britain’s two-party system is being eroded by an unprecedented surge of support for smaller parties. This Bloomberg Brief report examines the implications of the most uncertain general election in a generation.

U.k. Election Special

  1. 1. Wednesday April 15, 2015
  2. 2. April 15, 2015 Bloomberg Brief U.K. Election Special 2   QUICKTAKE ROBERT HUTTON, BLOOMBERG NEWS U.K., Bastion of Two-Party System, Shatters Into Many The 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 support to parties focused on targeted causes — fighting immigration, protecting the environment and winning independence for Scotland. Giving voice to disgruntled voters promises to expand political discourse. It also threatens to produce an unruly parliament that hampers decision making in the world’s sixth-biggest economy. Opinion polls predict no decisive winner, which would force the two main parties to cajole as many as seven smaller groups to prop up a minority government or an untidy coalition. Prime Minister David Cameron’s Conservatives and the main opposition Labour 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 to end welfare cuts, and the U.K. Independence Party, whose populist leader, Nigel Farage, has thrilled economically marginalised parts of England by pushing for Britain to leave the European Union and stem the flow of immigrants. The Scottish National Party is poised to win the third-biggest block of seats and emerge as a key power broker. Its membership took off after the defeat of the September independence referendum. Spooked by defections, the main parties are focusing on core supporters, which restricts their ability to win new voters. Labour plans a “mansion tax” on the rich and is ahead in some polls, though voters are having a hard time seeing its leader, Ed Miliband, as a potential prime minister. The Conservatives promise to hold a referendum on leaving the EU if the party wins the election. The U.K.’s constituency-by-constituency winner-takes-all voting system makes it difficult 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’t want to join other parties to form a government, but instead plan to sell their support on an 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 form Britain’s first peacetime coalition government since 1945. Many political analysts warn that the U.K. risks ending up with a government with no clear mandate to rule, struggling to cobble together deals to get even the most minor issues through Parliament. That could make it difficult to pass unpopular measures, like spending cuts. Cameron became the first prime minister in more than 150 years to lose a vote on military action when Parliament rejected a plan to bomb Syria in 2013. The election could end up destabilising a permanent member of the United Nations Security Council, a nuclear power and a key advocate of tough sanctions against Russia over Ukraine. CONTENTS ELECTION GUIDE Seven reasons this parliamentary election challenges the rule book. PAGE 3 THE POLLS Breaking down the arithmetic shows how uniquely close this election is. PAGE 4  SEAT MAPPING Assigning vote shares to seats shows no party near the necessary 326. PAGE 5   SCOTLAND The SNP is becoming the third-biggest force in U.K. politics. PAGE 6   MINORITY REPORT Support for UKIP and the Greens is unlikely to translate into many seats. PAGE 7   FISCAL GAP The two biggest parties are £100 billion apart in planned net borrowing. PAGE 8   TWO SCENARIOS A Labour government is most likely, while the Tories can hope for a surge. PAGE 9 ECONOMIC IMPACT Fiscal credibility matters more for U.K. asset prices than the speed of cuts. PAGE 10 THE ODDS Punters expect the Conservatives to take more seats but Labour to govern. PAGE 11 MARKETS Sterling, gilts and equities show how unsettling domestic politics can be. PAGE 12 SLOGANEERING The Tories appear to be winning the battle of sound-bites. PAGE 12 Britain's New Multiparty Reality
  3. 3. April 15, 2015 Bloomberg Brief U.K. Election Special 3 ELECTION GUIDE ROBERT HUTTON, BLOOMBERG NEWS Welcome to the Election That Challenges the Rule Book While the result may be up in the air, there are some smart things to know about the way things will develop between now and 7 May. Polls Aren’t an Infallible Guide Opinion polls give a prediction of the vote each party will get. The difficulty comes in translating those percentages into seats in Parliament. The U.K. elects 650 members of the House of Commons, with each seat going to the candidate with the most votes. In 2010, the Conservatives got 36 percent of the vote and 47 percent of seats. By contrast, Labour under Tony Blair took 35 percent of the vote in 2005 and garnered 55 percent of the seats. According to Anthony Wells of YouGov, even talk of error margins gives a false sense of precision. “All we know is that polls aren’t precise,” he says. He quotes what statisticians call Twyman’s Law: “If a statistic looks interesting or unusual, it is probably wrong.” The Biggest Party Doesn’t Get First AfterShot at Forming a Government: the inconclusive election of February 1974, Conservative Prime Minister Edward Heath, with fewer seats than Labour, stuck it out in his Downing Street office until the start of the following week in a bid to form a coalition. In 2010, talks between the different parties carried on in parallel. There are no rules about how parties should seek a coalition agreement. And there are no time limits for negotiations, except the next general election in 2020. There isn’t even a rule about when one prime minister should resign to allow another to take over. Just Because He’s Lost, the Prime Minister Doesn’t Have to Resign: In fact, he isn’t allowed to step down until a successor is in place. “There’s not a formal mechanism,” says Philip Norton, professor of politics at Hull University. “He really goes at the point where it becomes clear that the other parties’ negotiations have reached a stage where they have a majority.” The model is 2010, when Labour’s Gordon Brown stayed in office for five days after losing the election, while the Conservatives and Liberal Democrats hammered out a deal — and Brown clung to the possibility that the Lib Dems might swing back Labour’s way. It’s Not That Straightforward to Have a The inconclusiveSecond Election: February 1974 election was followed by another vote in October, in which Harold Wilson’s minority Labour government won a small majority. This time around, a second election may be harder to trigger thanks to the Fixed-Term Parliaments Act, which requires the support of two-thirds of MPs for an early election. A slightly lower hurdle is for the government to lose a vote of no confidence. But if that happens, opposition parties get 14 days to try to form a government before an election is called. So a minority government needs the opposition’s consent before it can call an election, and any time the governing party thinks is good for an election is likely to be bad for the other side. Most Votes Doesn’t Mean Most Seats: The voting system has tended to favour Labour in recent elections. That is partly explained by electoral boundaries, set by an independent commission, moving more slowly than people. Seats where Labour does well, in inner cities and deprived areas, often have smaller populations. Labour has historically been better at deploying its resources, winning many seats by narrow margins rather than piling up votes in seats. Smaller Parties Will Struggle to Win UKIP is averaging 13 percent inSeats: the polls, but they’ll be disadvantaged by the winner-takes-all voting system. The gap between vote share and seats gets starker the fewer votes you receive because your support is spread out into lots of losing piles. In 2010, the Liberal Democrats won 23 percent of the vote and just 9 percent of the seats. That’s why few pollsters think UKIP’s current poll rating will translate into more than six seats. There is, though, a tipping point at which the electoral system suddenly helps smaller parties to become larger parties. The Scottish National Party may have reached this level: In 2010 it won six seats, and current projections have it winning as many as 56. About 5 MPs Won’t Take Their Seats: Sinn Fein, the Irish republican party, refuses to recognise the right of a Parliament in London to rule Northern Ireland, and so its elected members, five at the moment, have never taken their seats. This reduces the number of votes needed to get a majority to 323 or so from the official number of 326. Source: Bloomberg/Jason Alden
  4. 4. April 15, 2015 Bloomberg Brief U.K. Election Special 4 POLLS JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST Breaking Down the Arithmetic of a Uniquely Close Election The rise of small parties in Britain complicates the mapping of vote shares to parliamentary seats in an electoral system that differs substantially from that of the U.S. Without a big swing before the 7 May election, a hung Parliament looks unavoidable. Whichever of the two main parties gains the most seats can probably claim a democratic mandate — albeit a weak one — to try to form a government. With the Conservatives and Labour whisker to whisker in the polls, it’s impossible to be confident about which one that’ll be.   There are five main polls in the U.K. that survey on a monthly basis at a minimum. The survey methods vary between the telephone and Internet, and efforts are made to adjust for the demographic profile of respondents to achieve a representative draw. Some were more accurate than others in predicting the 2010 election outcome, though there is no particular reason for that to be repeated this time — the volatility of the polls just before the election suggests their accuracy could easily have been by chance. The differences between the polls are summarised in a table available at http://b In the U.S., state-by-state polling is extensive and the sample sizes are large. It is that volume of data that facilitates the sort of analysis Nate Silver of conducted that correctly predicted the 2012 election outcome in all 50 states. At 650, the number of constituencies in the U.K. is 13 times the number of American states even though the population is just one fifth of the U.S. — it would simply be too expensive to poll them all. Instead, the British are left to puzzle over the national aggregates and look to the Ashcroft survey of marginal constituencies as a guide to the behaviour of swing voters. The scope for prediction errors, and therefore election-related market reactions, is probably greater in the U.K. than it has lately been in the U.S. While the polls appear to be relatively stable in a band of plus or minus two percentage points, within it they are volatile, thanks partly to relatively small sample sizes. To gain a broader indicator of sentiment, polls are typically weighted together — often taking a simple average. An alternative is to apply a statistical technique known as Principal Components Analysis that attempts to extract a common underlying signal from the polls. Applying that technique to the U.K.’s five most comprehensive monthly polls and benchmarking them to the mean and standard deviation of the ComRes poll (which was not biased one way or the other in 2010) gives the results illustrated in the chart. The technique may confer only a small advantage over the simple average with differences from it ranging between plus or minus one percentage point of the vote share. This Bloomberg Intelligence analysis puts Labour and the Conservatives virtually tied in April. The Liberal Democrats seem roughly to be treading water against a backdrop of gently waning support. The Conservatives look to have made up some ground over the past few months, possibly reflecting the improving economic outlook, which is important to voters. Having been vulnerable to Labour’s “cost of living crisis” narrative, the Conservatives are benefiting from the falling cost of oil lowering inflation and lifting real wage growth — though the latter remains very weak by historical standards. Together with lower interest rates, that has also provided a fillip to the public finances. The final budget of the current Parliament was published on 18 March and received generally positive press coverage. Yet that seems not to have translated into a meaningful boost to the Conservatives or the Liberal Democrats, based on the polls that followed it. The big change since the 2010 election is the evaporation of Labour’s support in Scotland. The independence movement has energised the Scottish National Party, which now looks likely to claim many of Labour’s seats north of the border. The appointment of a new leader for Scottish Labour so far seems to have failed to reverse that trend. The challenges of coalition government have not been kind to the Liberal Democrats, and they can expect to shed a large number of seats. A backtrack on a pre-2010 election pledge to prevent student tuition fees from rising left many supporters feeling betrayed, and the tie-in with the Conservatives remains toxic. The rise of UKIP has also seen Nigel Farage’s party claim a higher proportion of the expected vote share from the two biggest parties. While that won’t translate into many seats, it will unevenly sap votes from the traditional parties — possibly tilting the balance between them in some constituencies. — With assistance from Niraj Shah of Bloomberg Intelligence Whisker to Whisker: Our Estimates of the Polls
  5. 5. 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 the possible victor. Whoever gets the most seats probably has the strongest mandate to form a government — and that’s likely to be a protracted process. Polls in the U.K. are conducted at a national level, so they estimate the vote share only. Even if the polls were 100 percent correct (and they vary widely), analysts would still have to map that vote share to seats. That task has become much more complicated with the movement from what was roughly a two-party system to one under which six parties might reasonably be expected to take a meaningful number of seats. That development is prompting a wide range of forecasts among pollsters making this election uniquely uncertain. Here's how a few of the main political analysts expect vote shares to translate into seats (see tables). The key thing to take from it is that under each scenario the election outcome is a hung Parliament — no party would be anywhere near the 326 number of seats required to form a majority government (or 323 excluding Sinn Fein, which usually does not take its seats). The Bloomberg Intelligence estimates of the vote shares can be mapped to the seat count in a relatively mechanical way by applying the average translation from political analysts between votes and seats. That would be consistent with a very narrow lead for the Conservatives, with 277 members of parliament, compared with about 270 for Labour and no more than 22 for the Liberal Democrats — that result would probably give the Conservatives a mandate, albeit a weak one, to try and form a government. It is worth remembering that sampling error and scope for seat-mapping error mean the gap between the two main parties is nowhere near big enough to be confident of that outcome. Without a big swing in the polls, uncertainty will remain elevated to the very 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 21 Source:, The Guardian.    No Party Is Likely to Achieve an Outright Majority
  6. 6. 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 Lost John Donnelly adjusts the hood shielding him from the cold Glasgow rain and walks up to another house. One of a squad of six Scottish National Party activists on an evening of campaigning in the east end of the city, he reports back to his colleagues: “Ninety-three is SNP.” The finding is logged on a soggy page on a clipboard. While a few smiles brighten the damp night, for Donnelly, 27, this is a serious business. His mission is to overturn half a century of Labour dominance in Scotland, evict the party from its traditional heartland and redraw the political map of Britain at the general election. “For me, this is work,” he said. “But I wouldn’t be able to look myself in the mirror if I didn’t do something.” Six months after a referendum on independence put politics back into pubs and living rooms, the movement that brought voters out in record numbers and rattled financial markets has evolved into a mass phenomenon sweeping Scotland. Rather than retreating after Scots voted to remain in the three-centuries-old union with England, the nationalists have harnessed that radical spirit and directed it at the Parliament at Westminster. SNP membership has quadrupled to 100,000, or one in 43 Scottish voters, and polls suggest the surge in support will translate into votes, placing Scotland once more at the heart of deciding the U.K.’s fate. “It’s unprecedented, on a different scale,” Nicola McEwen, associate director of the Centre on Constitutional Change at Edinburgh University, said. “The referendum was never about a simple ‘yes’ or ‘no.’ I just didn’t foresee how the extent to which the ‘yes’ alliance mobilised behind the SNP.” The party’s rise is reverberating beyond Scotland’s borders because polls point to the election producing no clear winner, potentially handing the SNP a decisive role in who governs the country which they are committed to splitting up. Much of the focus in England has been on a disaffected electorate and the rise of the Greens and UKIP. Yet the voting means they will probably win nosystem more than a handful of seats.    Polls show the SNP is ahead in at least   40 of Scotland’s 59 districts. It currently has six MPs at Westminster. If the polls are replicated on Election Day, the SNP could become the third-biggest force in the U.K., with Labour, which has dominated Scottish politics for decades, the biggest casualty. “Scotland will decide who governs the U.K.,” said Jim Murphy, leader of the Scottish Labour Party. “That’s how high the stakes are and it’s no use pretending otherwise.” Murphy, 47, acknowledges the scale of the challenge. “These numbers are terrible for the Labour Party and worse for Scotland,” he said. While the nationwide trend is for younger voters to shun politics, the SNP is managing to resonate in a way that echoes the “cool Britannia” phase in the 1990s of Labour Prime Minister Tony Blair’s first term. The proportion of under-30s in the SNP has doubled to 21 percent, among them campaigner Donnelly, who joined the party the day after voting “yes” in the referendum. People across Scotland refer to a sea change in the country’s politics since the 2010 election, when not one Scottish seat at Westminster changed hands compared with five years earlier. By the following year, the SNP had won an unprecedented majority in elections to the Scottish Parliament in Edinburgh, paving the way for the independence referendum. Defeat for the “yes" campaign should have been the end of the movement. Instead, as the pound dropped in response to a poll showing the "yes" side ahead in the final days of the campaign, Prime Minister David Cameron offered Scotland new financial powers in an effort to sway the vote in favour of the union. That left an opening for the SNP to exploit with the argument that voters needed to return a block of SNP MPs to ensure those powers were delivered. Yet the legacy of the referendum runs deeper for many. "It totally changed my life," said Philippa Whitford, a consultant breast-cancer surgeon who is running for the SNP in Central Ayrshire, a district of former mining communities and more affluent towns on the west coast that was once the stomping ground of Scotland’s national poet Robert Burns. It also used to be safe Labour territory. No longer. Whitford, 56, worked as a medic in Gaza in the early 1990s, and parted company with Labour over its support for the war in Iraq. She joined the SNP in the wake of the 2011 landslide and was among the women candidates proposed by the party after standing out during the referendum campaign. The dynamism the referendum produced never petered out as people started looking toward the next election, Whitford said over tea at her home. "After the vote, you could just feel people coming out of their caves and blinking in the sunlight,” she said.     The SNP's Fortunes at Westminster Look Set to Change
  7. 7. 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 conferences confident they are on track to cause a political earthquake on 7 May and decide the course of the next government. They are half right. The advance of the two parties, from opposite ends of the political spectrum, changes the dynamic in about a fifth of the 650 seats in the Parliament by threatening to siphon off votes from the two main parties, the Conservatives and Labour. But as the ballots are counted, the surge is unlikely to translate into more than a handful of seats, leaving them on the sidelines when it comes to in any coalition negotiations. “There’s an expectations management problem,” said Matthew Goodwin, co-author of , a studyRevolt on the Right of the rise of UKIP. “Activists are measuring the curtains for Downing Street, but UKIP will do well to win six seats.” The vote promises to be the tightest since the 1970s, with any number of scenarios dictating who forms the next government. The electoral system is based on competing for individual seats, meaning vote share nationwide counts for nothing if candidates can’t win a majority. Since 2010, when it won 3.1 percent of the vote and no seats, UKIP has ridden a tide of anger toward the main parties over the economy, immigration and relations with the European Union. It now polls in third place, with about 13 percent. With the Greens, they account for more than 20 percent of the vote. The Greens won just one seat in 2010 and, despite competing in more than 500 in May, are unlikely to win any more. The Scottish National Party, by contrast, might take less than 4 percent of the U.K. national vote yet come away with as many as 50 seats, based on recent polling. All three have rejected being part of a formal coalition, and instead have talked about selling their support in parliament on a vote-by-vote basis. At his party’s election launch on 12 February, UKIP leader Nigel Farage spoke of “campaigning” for policies rather than promising to deliver them, a marked contrast 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 market town in Lincolnshire where many immigrants from eastern Europe have settled, said at the UKIP conference. “That’s how we’ll make a difference.” Nigel Jones, the party’s candidate for Eastbourne, was a little less optimistic. “I’m pretty certain that we will get 10 to 12 seats,” he said. “We can be one of the brokers of power.” There were similar voices at the Green’s gathering in Liverpool. Caroline Lucas, the party’s only MP, predicted an alliance with the Scottish and Welsh nationalists to drive an anti-austerity and anti-nuclear agenda. “We can support Labour when they do the right thing, but block them when they try to ape the Tories,” Lucas said in her conference speech. “After this coming election we can do far more whether we have one Green MP or 10, we can be part of a progressive force for good.” Should UKIP end up winning six seats, its influence is likely to matter only in very tight votes. Farage has ruled out supporting a Labour government, and he won’t have much to offer to Conservative leader David Cameron. Two of those UKIP members would be likely to be former Tories Douglas Carswell and Mark Reckless, who both defected last year. Cameron might point out to Farage that even when they were in the Conservatives, voting records show they couldn’t be relied on to support the party’s policies. That doesn’t mean that UKIP and the Greens aren’t important. They can upset results in tight seats by taking votes that other parties were counting on. Goodwin, the author, estimates UKIP threatens the Conservatives in about 70 seats and Labour in 60. And if UKIP comes second in a large number of Labour seats, the party may reconsider its position on an EU referendum. “The number of seats they can win is quite minor, the number of seats that they could complicate is quite large,” Andrew Russell, professor of politics at Manchester University, said. “You’ve then got the chance to influence the agenda of the other parties as well.” At the Green conference, while some activists were realistic about their party’s prospects, others still said they believe power is in their grasp. “Everyone’s going to be in for a surprise, we’re really going to put the other parties to shame this time,” said John Devine, 65, the Green candidate in Amber Valley in the Midlands. “There are so many people out there who are starting to look seriously at our policies.” Source: Bloomberg/Jason Alden UKIP supporters at the party's pre-election conference in Margate
  8. 8. April 15, 2015 Bloomberg Brief U.K. Election Special 8 FISCAL GAP JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST Parties Are Running About £100 Billion Apart With a hung Parliament in prospect, no political party is likely to have the luxury of governing alone and fully implementing its plans. Still, ahead of the post-election negotiations, it is worth looking at what each of the main parties will bring to the bargaining table. The Conservatives have the tightest fiscal policy. The Labour Party seems to have the flexibility to meet its policy objectives and, at the same time, end austerity (if defined as real-term spending cuts), while the Liberal Democrats have cut a path down the middle. In any event, borrowing in the next Parliament is likely to be higher than was projected in the Conservative and Lib Dem coalition’s March 2015 budget statement. The spending cuts as currently planned by the Conservatives are significant, especially given how much they have cut already. The two biggest parties may be about £100 billion apart in terms of borrowing plans by the end of the next Parliament. For a table of Bloomberg Intelligence's interpretation of how each of the parties' policies would affect public-sector net borrowing, see . Conservatives The Conservatives in these calculations are assumed to borrow a bit more over the next few years as NHS spending ramps up to an extra £8 billion in today's money. That erodes the overall borrowing surplus at the end of the next Parliament. These plans suffer from a credibility issue: very sharp spending cuts in 2016/17 and 2017/18, before reversal later on. It doesn’t help that the Conservatives haven’t said anything about how those cuts would be achieved, despite having access to the machinery of government. Labour We assume that a Labour government holds spending constant in real terms beyond 2015/16 for the NHS but tops that up with £2.5 billion extra a year, and also that education spending is flat in real   terms and spending on international development is constant as a share of national income. It’s also assumed that Labour would cut real departmental spending in unprotected departments every year until the current structural deficit is eliminated — the party has stated publicly that it would do so. Compared with the policy path assumed for the Conservatives, the Labour scenario would see the Treasury issue about £101 billion more in debt over the next Parliament, leaving debt 4.6 percentage points higher as a ratio to GDP by the end of it. The figures here depend on Labour cutting unprotected departmental spending by 1 percent a year in real terms after 2015/16. Deeper annual cuts of 1.5 percent would see the structural deficit eliminated a year earlier and cumulative borrowing would be lower. Liberal Democrats The Lib Dems are assumed to follow the policies laid out in the “yellow book” delivered to Parliament after the official coalition budget. Again, the extra spending means more borrowing. In cumulative terms, over the next parliament, the Lib Dems would borrow about £53 billion more than the coalition's baseline, £29 billion more than the Conservatives and about £72 billion less than Labour. Fiscal Outlook There are very significant differences between the main political parties’ economic and fiscal plans. The coalition’s budget baseline policy is probably so tight and concentrated on relatively few government departments that the economy would struggle to make the required adjustments without disruption. The Conservatives’ plans are the tightest of the three main parties and consequently deliver the fastest reduction in the debt-to-GDP ratio. The policy mix means the squeeze on departmental spending should be achievable, but it comes with risks, and the absence of detail is a significant concern. Labour’s plans are the least onerous, with departmental spending flat in real terms by the end of the next parliament. That still represents a squeeze on service delivery since the population is expanding and aging. The price is more borrowing, though debt would still fall as a share of GDP over the next parliament. The Lib Dems' policies would also see more borrowing, cutting a path between the Conservatives and Labour. That leaves them in a good place to negotiate as part of a new coalition government. How the Parties' Debt-Reduction Plans Compare
  9. 9. 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 Out Absent a big swing at the ballot box, whatever government emerges from the political fog will depend on some degree of cross-party cooperation — that fact alone should protect the U.K. economy from the worst outcomes. The politics of this election are uniquely complicated by the rise of the Scottish National Party, which is likely to take a significant number of Labour seats in Scotland and prevent it gaining an overall victory in the wider U.K. For the purposes of assessing the effects of different governments on the economy there are a couple of main scenarios worth considering. Labour Minority Government If the seat count comes in as page 5 illustrates, the formation of a minority Labour government supported by the Scottish National Party and possibly the Lib Dems is the most likely outcome. However, the route to it could be a bumpy one. First up, the Conservatives would probably have the most seats in parliament and a mandate to try and form a government. With just 277 seats, the Tories would be miles short of a majority and, even with Lib Dem and Democratic Unionist Party support, would fall short of one that is workable because the opposition parties could carry a vote of no confidence. There might reasonably be questions over whether Labour can justify forming a government having taken fewer seats than the Tories. But the fact is that the mandate for a centre-left progressive government would be strong. Labour, SNP and Lib Dem policies (beyond Scottish independence) are all in the same ball park and together the parties would take the most seats and account for the highest share of the vote by a decent margin. With the SNP campaigning to split up the U.K., it would not be acceptable for the party to hold any ministerial positions — an official coalition government has already been ruled out by both parties.   Instead, the SNP would agree to support Labour to prevent other parties bringing down the government with confidence votes and make sure it is able to get its Budget statements through parliament — this is known as a confidence and supply arrangement. The Lib Dems could probably be persuaded to do the same but there is little reason for Labour to offer any ministerial positions. Under this scenario, the House of Commons would look like the chart above. Policywise, the SNP wants to end the "austerity politics of the Westminster establishment" and Labour could meet its fiscal objectives without any real-term reductions in overall government spending — though some unprotected departments would experience cuts. The U.K.’s position in Europe would be safe, since neither party wants a referendum on EU membership. That the SNP could demand another referendum on Scottish independence as the cost for its support further down the line would present a significant challenge to the longevity of a government of this form. Conservative Minority Government On present polling, the Conservatives would not have anywhere near enough seats to command a majority. However, a significant prediction error or shift in the polls to consistently above 36 percent of the vote share could see the party win 300 seats. It would still need support from other parties, potentially the Lib Dems and the DUP. It’s likely that the Tories and Lib Dems would meet in the middle in terms of policy — smaller departmental spending cuts and slower deficit reduction, but still tight fiscal policy overall. On Europe, neither the Conservative leadership nor the Lib Dems want to see the U.K. leave the EU. It’s possible, therefore, that Lib Dems could demand abandonment on the referendum as the price of its support. The risk is that anti-EU sentiment continues to fester among Tory backbenchers. Given the slim margin of seats, they would have more power. That is the single biggest risk to Conservative party cohesion and thus the longevity of a Tory minority government. Wild Cards Other scenarios include a significant swing in the polls to produce a majority Conservative or (less likely) Labour government — or a 'nobody wins' scenario, even after negotiations, that would trigger new elections.   How a Labour Minority Government Might Look
  10. 10. 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. Parties The fiscal plans of all three major parties are consistent with medium-term deficit reduction and falling debt relative to the incomes that service it. It’s the credibility of those plans that is crucial in determining the premium paid on British debt, and the speed of fiscal consolidation is probably far less important. The 2010 general election is a good example. Again, it was a close one (a hung parliament was in prospect) and the parties were thought to be some distance apart on the scale of fiscal consolidation plans. If the party in power mattered much, movements in the cost of British debt over that period could have been expected. Indeed, British 10-year borrowing costs fell from about 4.1 percent at the beginning of 2010 (when the Labour Party might have been expected to win) to less than 3 percent by August of the same year (some time after the Conservative-led coalition’s emergency budget). Some might be tempted to attribute the fall in borrowing costs to the changing political landscape, but that would be wrong. Rather than a fall in the gilt risk premium, the decline in 10-year borrowing costs can be explained almost entirely by lower expectations for policy rates, as the chart illustrates. What’s more, the same movement in rates was experienced in the U.S., indicating a substantial global influence. All else equal, politics could have had an effect of about 0.2 percentage point on 10-year gilt yields, but that’s probably an overstatement of the election’s impact. Fiscal Policy Effects While the political party that comes to power is unlikely to have a significant direct influence on government borrowing costs, its fiscal policy stance may have an indirect influence via monetary policy. The size of the fiscal consolidation has a direct read across to the degree of   monetary activism required to stabilise demand in the U.K. economy. Indeed, one of the reasons monetary policy is currently so loose in the U.K. is that a sizable consolidation is in prospect for the next Parliament. The difference between the fiscal policies of a Labour minority government — assuming it gives no ground to the Scottish National Party on scaling back austerity — and a Conservative minority government could be significant. Because fiscal consolidation leeches demand from the economy, there would be more of offset needed from monetary policy to keep the economy on a stable growth path under the Conservatives. That means a lower path for policy rates and sterling. The EU Referendum Above all it is crucial to recognise that the probability of a U.K. exit from the European Union is extremely low — this is what stands between the general election and significant U.K.-centric market volatility. The reasons for that are several: First, whoever forms a government is very likely to depend upon the support of at least one party that doesn’t want to hold a referendum and may demand its abandonment as a price for support. It would only be if the Conservatives won a majority that a referendum would be assured — as mentioned earlier, the odds of that are slim. Second, even if a referendum is pledged, whether senior Conservative leadership campaigns to stay in the union depends on what concessions can be negotiated with other European governments — since neither Prime Minister David Cameron nor Chancellor of the Exchequer George Osborne wants to leave, the bar would be low. Third, even if a referendum is held and the Conservatives campaign to leave, public support for staying has rarely been higher — 45 percent want to stay, with just 35 percent voting to leave. Since it would take time for opinion to shift in that direction, a more meaningful Europe-related market reaction might more realistically be expected to come a long while after the election itself. Decline in Yields in 2010 Largely Due to Lower Global Rates
  11. 11. April 15, 2015 Bloomberg Brief U.K. Election Special 11   THE ODDS PAUL SMITH, BLOOMBERG BRIEF EDITOR Punters Give Overall Majority Less Than 15% Chance The 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 a hung Parliament has risen to 87 percent, according to Betfair. A Tory majority is priced at 11.5 percent and the likelihood of an outright 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 64 percent chance of outnumbering its rivals; Labour is languishing on 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), a Labour minority is the most likely government at 33 percent, according to the odds. This chimes with recent polls and Bloomberg Intelligence . A Tory minority is the second-most probable outcome at 26 percent, followed by a Conservative majority at 11.8analysis percent. 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. The chances cited in the captions are based on Betfair mid-prices as of 14 April).
  12. 12. 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 the global investment community. The prospect of a hung Parliament, with neither Labour nor the Conservatives winning enough seats to form a government, and both reluctant to co-opt a smaller party into a full coalition, is making investors wary of owning U.K. assets. The distress is most evident in the currency market, where the pound has fallen to its weakest in five years against the dollar, as the first chart illustrates. The government bond market is also showing signs of stress. The gap between what investors charge the U.K. government to borrow for a decade versus how much they charge Germany has been widening in recent weeks. Gilt yields have edged higher while German bund yields continue their descent toward zero. Some of that move is due to what's happening in the euro zone, where the European Central Bank is making good on its pledge to buy 60 billion euros ($64 billion) of government debt each month, driving yields lower. But foreign investors dumped a net £14 billion of U.K. government debt in January and February, suggesting overseas distaste for gilts is also playing its part in widening the borrowing gap against Germany. The equity market isn't unscathed by political concerns. The benchmark European stock market index, the Stoxx Europe 600, has outpaced the U.K.'s FTSE 350 index by 2.46 percent since the gilt market started to take fright on 25 March. On an annualized basis, that means U.K. stocks are delivering less than a third of the return investors have achieved in European equities. The market moves provide a timely reminder that domestic politics can be just as unsettling for financial markets as geopolitical ructions, albeit on a more parochial basis. Conservatives Beat Labour in Battle of the Slogans BY PAUL SMITH, BLOOMBERG BRIEF EDITOR In one of his more lucid moments, frontman JimDoors Morrison said, "whoever controls the media, controls the mind." Apply this rockstar aphorism to the election and David Cameron's Conservative Party should comfortably beat Ed Miliband's Labour Party on 7 May. In the battle of the slogans the Tories' "long-term economic plan" appears in almost five times as many news articles in March than Labour's choice shibboleth, "cost of living crisis." (The story counts are derived from Bloomberg's News Trends function that searches through articles from more than 100 different news sources.) A simplistic analysis, perhaps, but this peddling of sound-bites by the Fourth Estate may support the assertion of Simon Wren-Lewis that the U.K. media has a distorted and biased view of economic policy. Wren-Lewis, an economics professor at Oxford University, has dubbed this . He contendsmediamacro that the media are more obsessed with the budget deficit than holding the governments' policy of austerity to account. Still, while the Conservatives seem likely to win more seats than Labour, they are unlikely to break on through to the other side of the 326-seat threshold required for an absolute majority. Pound Suffers Election Fever Political Risk Is Rising Riders on the Media Storm
  13. 13. April 15, 2015 Bloomberg Brief U.K. Election Special 13         CONTACTS Bloomberg 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
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    May. 29, 2015
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    May. 2, 2015

Britain’s two-party system is being eroded by an unprecedented surge of support for smaller parties. This Bloomberg Brief report examines the implications of the most uncertain general election in a generation.


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