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Hung parliament: impact on UK economy

Updated Friday, 7th May 2010

What does a hung parliament mean for the UK economy?

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The eurozone crisis, centred on Greece, gives the UK a short interval in which to clarify its economic and political direction, before financial markets start to worry about its own debt. But a hung parliament leaves it unclear how the UK will start to reduce its record budget deficit, and stabilise debt at affordable levels. Once Germany underpins Greece, attention will be turned to UK public finances – and will become critical if there is no clear prospect of a government able to force unpopular spending cuts and tax increases through Parliament.

Nick Clegg addresses the Take Back Parliament protest, May 8th 2010 Creative commons image Icon LewishamDreamer under CC-BY-NC licence under Creative-Commons license
Nick Clegg addresses the Take Back Parliament protest, May 8th 2010

When Germany encountered a similar problem in 2005, the two big parties formed a ‘grand coalition’ which then passed difficult adjustment measures. One problem for the UK is that many foreign investors don’t understand why the Conservatives and Labour can’t do the same. If either of the big parties tries to form a minority government, there will be doubts about its ability to tighten the budget, and the UK’s top credit rating could be at risk. The danger will grow if there is prolonged, inconclusive discussion on coalition formation, or if the next government gets absorbed in constitutional issues such as changes to the voting system.

The UK’s export-led recovery is at risk from a sinking euro, and it could be hit by a general sell-off of European bonds and currencies if the crisis spreads from Greece to other eurozone members. But a speedy resolution of the eurozone crisis would also be bad for the UK, since it would highlight the assistance that deficit nations can receive from the zone, which non-members don’t enjoy.

One reason the Conservatives did not get the swing they hoped for, into a clear majority, is that the eurozone’s problems blunted their message on the economy. It became harder to claim that the UK had suffered a worse economic downturn than other European economies – because Germany has already suffered a deeper recession, and it’s now clear that there may be worse to come for several other members of the zone.

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