Hang together, not separately

Last Updated: Sun, Apr 18, 2010 20:30 hrs

Hung parliament: Fears of a hung parliament following the UK's general election may be overstated. With Nick Clegg, leader of the Liberal Democrats, Britain's third largest party, performing well in the first prime ministerial debate, sterling has received a mild knock.

Investors do not like the uncertainty that goes with a hung parliament. While many European countries are used to coalition government, the UK is traditionally a two-party system - with government swinging between Labour and the Conservatives.

Added to this uncertainty is the fact that none of the three parties has come up with a credible plan for cutting the government's deficit, which stands at 12 per cent of GDP. One fear is that valuable months could be lost in horse-trading over forming the next government. Another is that a minority government could embark on a populist, but expensive, programme to prepare the ground for a second election later this year.

The hung parliament scenario is really two sub-scenarios. In the first, the party with the largest number of seats would govern on its own. This is probably what would happen if the Tories were the largest party. Such a government might well be unstable.

The second sub-scenario is a majority formed through a coalition with the LibDems. This is more likely if Labour emerges as the largest party. That's because it has offered to change the system for electing MPs - something the LibDems and their predecessor parties have wanted for decades. Indeed, during Thursday's debate, Labour's Gordon Brown several times dangled this olive branch.

A formal "Lib-Lab" pact would still need to come up with a credible deficit reduction plan. But arguably this would be easier with a coalition that had been supported by over 50 per cent of the electorate. What's more, if it did not have overall power, Labour would have a ready-made excuse for abandoning pledges made in its manifesto, which would otherwise tie its hands in confronting the deficit.

If there is a hung parliament, it will be better to hang together than hang separately.

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