Chancellor of the Exchequer George Osborne showcases the famous red briefcase before delivering this Parliament’s final budget to the House of Commons. Source: Getty Images/Bloomberg.
A guy walked out of an old London townhouse holding a red briefcase Wednesday, and with that photo-op, the UK election campaign was off and running.[i] Yes, it’s Britain’s Budget spectacle, where the government toots its own horn, the opposition blasts them, leaders announce sweeteners, and opposition leaders argue those sweeteners are bitter pills. It’s an annual rite, and that rite is even noisier this election year, as both major parties used the Budget to launch their economic campaigns. Now come 40-something days of debating, one-upping and bargaining—and all the accompanying noise. While it’s too early to handicap the winners, the likeliest outcome is more gridlock—bullish for UK stocks.
UK elections aren’t like the US, where parties have loose agendas and each candidate sets their own platform. Instead, each party releases an official manifesto—a creepy way to describe their formal campaign pledges, which they’re accountable for implementing during their five-year term. Neither of the two main parties has released theirs yet, but the Budget gives voters a preview of the “economy” portion. Predictably, the Conservative Party’s argument sums up as “we got you this far into recovery, our forecasts look lovely, and only we can get you the rest of the way there.” For good measure, they topped it with some sweeteners like a lower beer tax, a government-match program for first-time homebuyers saving for down payments, more flexible tax-free savings plans, a minimum wage hike and more pension reforms. Bank-bashers will get their kicks, too, courtesy of higher bank levies. Something for everyone, we guess. (And nothing with much economic impact—there are a few winners and losers, but the changes are mostly window dressing.) Unsurprisingly, the Labour Party’s response sums up as “don’t trust ‘em—they’ll doom you with austerity, they haven’t said a peep about the National Health Service, and you’re actually worse off than you were five years ago thanks to lagging real wages. We promise to make your life better and not budget-cut you back to the 1930s.”
Now, we could spend 1,200 words discussing the merits and demerits of each party’s claim, but that’s mostly sociology—politicians are admen first and foremost[ii], so they have less incentive to speak boring truths. Those boring truths include the fact long-term forecasts are folly, fiscal policy has probably helped and hindered Britain’s recovery equally, future spending plans aren’t 1930s-esque when you do the math, and you can find conflicting evidence about households’ financial status in every country on earth. There is a lot of hot air on both sides, folks—that’s not a knock, just a reminder these are politicians[iii]!
Besides, with the election not till May 7, manifestos still under lock and key and the whole campaign left to play out, there is little chance folks remember the Budget’s specifics come election day. And how that plays out is anyone’s guess. The Conservatives recently pulled ahead in most polls, but they’re still neck-and-neck with Labour. Plus, national polls aren’t so predictive in Britain. The UK votes by constituency, and the winning candidate in each gets a seat (like the US House of Representatives). So you must look at seat-specific polling, which currently has Labour leading but 31 seats shy of a majority. Polls this early aren’t predictive, of course, but they’re a baseline showing who has the highest hurdle to climb. Anything can happen, and the field is wide open. If you don’t believe us, Google “Neil Kinnock, Sun Magazine.”
Exhibit 1: UK Party Opinion Polls
Source: UK Polling Report, as of 3/20/2015. Monthly average polling results from YouGov, Ipsos-MORI, Populus, Opinionum, ICM, ComRes, Ashcroft, TNS BMRB and Survation, 1/2/2013 – 3/12/2015.
All that said, it would take an impressive feat of campaigning, phenomenal luck or a gargantuan scandal (again, Google “Neil Kinnock, Sun Magazine”) for either party to win an outright majority. Most likely, the UK gets another coalition or a minority government. Who forms it? Who knows. The UK Independence Party’s poll numbers are deceiving—that 15% of the vote is estimated to get them four seats. Their impact is more on the margins, potentially splitting votes with the Conservatives. Ditto for the Greens, who tend to split votes with Labour. Their influence might help the Liberal Democrats scrape out more seats than folks expect, but this is unknowable today. The Scottish National Party has the upper hand throughout Scotland, but Labour and the Conservatives have already ruled out joining forces with them.
Regardless of the final participants, though, a coalition or minority government means gridlock, which stocks like. A hung parliament makes radical legislation next to impossible, reducing the likelihood lawmakers can change property rights, regulations or the distribution of resources and capital—or otherwise create winners and losers, scaring stocks. This is a huge overlooked positive in Britain, where some are calling the election the worst choice of all time, a total Catch-22. Vote Conservative, leave the EU. Vote Labour, suffer under price controls. Gridlock prevents these and other potentially radical pledges we’ll probably see over the next couple months, bringing stocks much relief.
That said, we could see volatility as the election approaches and campaign pledges weigh on sentiment. That happened in the run-up to 2010’s election, too. And headlines surrounding a hung parliament could look scary! But longer-term, the relief gridlock brings should be an overwhelming, underappreciated positive.
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[i] If you were expecting a joke here, please accept our apologies.
[ii] If you want to read this as “liars,” we won’t object.