One of our key themes has been that markets should not necessarily fear a minority government. This conclusion draws heavily on work done by UCL’s Constitution Unit, which has looked at previous examples of minority governments that followed the so-called Westminster model. This included Canada and New Zealand, as well as Scotland before the SNP achieved a majority in 2011. It is also the opinion of Lord Donoughue, who headed the Number 10 Policy Unit between 1974 and 1979. And wind the clock back to the early part of the last century, and you can find examples of minority governments in the UK (1910-1915 and after 1929) that proved relatively successful.
A minority government cannot govern as if it has a majority, must pick its battles carefully and, from the outset, must manage the expectations of the electorate and the media. It has to rely on shifting allegiances for support, perhaps forming alliances with different parties on different issues. Arguably, the more experienced the ministers, the more likely they are to succeed in pushing through their agenda.
So a minority government in itself will not necessarily be a major issue. Rather, what matters is the form it would take, how stable it is, and what other issues it leads to down the line. From the markets’ perspective, if there cannot be a majority government, or the Lib Dems do not win enough seats to mean more of the same (they won 57 seats in May 2010, the Tories 307), arguably the second best solution would be a stable Tory minority government.
But what of the alternatives? A working assumption is that whoever ends up winning the most seats on 7 May will form the government. In terms of the big picture, it is not as if what Labour has put on the table is especially different from the Tories as far as fiscal policy is concerned. Over the life of a five-year Parliament, and compared to the level of GDP, a £30bn difference in fiscal tightening is not so big, especially if you attach a relatively high probability to the coalition not hitting its targets.
Anything that carries with it the risk of another referendum on Scottish independence, however, is best avoided, and there is concern over what a weakened Tory government could face running into a 2017 referendum on the UK’s membership of the EU. Certainly, it would be preferable if the election produced an outcome that didn’t leave the economy in limbo over the UK’s EU membership for the next two years, but that does not seem likely.
For as much as commentators would like to suggest that political risk is hanging over markets, this is not really apparent as yet. Yes, foreigners have been net sellers of gilts this year, but this should be seen as part of a more general move by international investors out of fixed income. Importantly, the spread between UK gilts and US treasuries is broadly unchanged, and the market has not changed its view about the timing and extent of UK rate rises.
Following the 6 May 2010 election, Gordon Brown remained in Number 10 until the evening of 11 May. This time, negotiations could obviously take longer. However, the Queen’s Speech scheduled for 27 May should focus the mind. As in 1979, a motion of no confidence by a simple majority could trigger another election, but this is probably more something to worry about one or two years down the line, not initially.
Finally, in terms of the Bank of England, we would make a couple of points. First, on balance, data releases point to the recovery continuing to build momentum, with unemployment according to the ONS’s experimental series now down at only 5.4 per cent, suggesting that markets may not be pricing in, on a one to two year view, enough risk of rate rises. Second, as far as Mark Carney is concerned, a minority government with a high proportion of MPs whose stated aim is the break-up of the union should be nothing really new. This is the position Canada, Carney’s home and previous post, has found itself in before.
Visit our General Election poll tracker to see how the polls changed in the build-up to election day.