Investec Comment: What the election could mean for SMEs
THE RISE of smaller parties across the UK has made this the most difficult General Election to forecast in at least a generation. We know that the SNP is likely to make major gains across Scotland, winning upwards of 40 seats, mostly from Labour. An increased Ukip vote will likely hit the Conservatives harder than their rivals (although this isn’t entirely certain), and there is also the Green Party to factor in. The Liberal Democrats are a further complication, given that the party is likely to retain control of some strongholds, while seeing its 2010 levels of support fade away elsewhere in the country. The tools we usually employ to analyse the likely outcome of an election no longer work as they used to.
As such, it is very difficult to tell what the next government will look like. The precise distribution of seats (for example, the extent to which the Conservatives lead Labour, or vice versa), could prove crucial, more so than normal. It is also not improbable that there will be no workable combination of parties able to form a formal coalition, meaning that Britain will have a minority government that has to depend on shifting alliances with different parties to get its business through Parliament.
For all this, however, the markets have remained remarkably calm. At around 1.7 per cent, 10-year gilt yields are lower than at the start of March, when they neared 2 per cent. Sterling has weakened against the dollar, but that’s mostly due to less positive economic data over recent months. If you look at the markets, the election has had little perceptible impact so far.
That doesn’t mean that it is not important for businesses, particularly small ones, however.
First, there is the prospect of an EU referendum and Brexit to consider. A Conservative victory would increase the risk of that outcome, and it is possible that we will begin to see some softness in corporate investment because of the perceived threat that the UK might exit the EU. This might come either from foreign investors being more reluctant to bring money into the UK, or from British companies being less confident about their own investment plans.
Second, Labour’s plans indicate a modestly softer degree of fiscal tightening than the Conservative plans. While parties don’t necessarily stick to their manifesto promises, Labour is seeking to cut a different version of the deficit – the current deficit, which excludes investment spending. So given that fiscal policy would likely be slightly easier under Labour, it is possible that we could see a slightly greater degree of monetary tightening from the Bank of England. The extent to which this might happen, however, is debatable.
Third, the outlook may be less positive if the next government or coalition is unable to command a majority. This isn’t a hard and fast rule: a formal alliance between Labour and the SNP is likely to be more left wing, and its policies may be more radical. But a coalition, in terms of policy certainty, would be preferable compared to a confidence and supply arrangement between multiple parties. Markets would begin to doubt the permanence of any loose agreement. Like the Liberal-Labour pact in the 1970s, it could quickly fall apart.
Finally, however, businesses should not necessarily expect a change of government to bring about a sharp increase in government intervention in the economy. To say that the current coalition hasn’t intervened in the financial sector, for example, is laughable, given the amount of new regulation introduced over the past five years.
Philip Shaw is chief economist at Investec.