The prospect of a hung Parliament after the general election has excited much comment about Britain’s future political and economic stability.

Conservative Business Secretary Ken Clarke claimed recently that a hung Parliament would be “catastrophic”.

"The electorate will bring upon themselves the consequences of financial panic if they produce a hung Parliament or a Labour minority government. It would be catastrophic”, Mr Clarke warned.

The claim represents a very serious warning to the voters ahead of the general election. Full Fact looked at other experiences of hung Parliaments and talked to market and political experts to investigate whether Mr Clarke’s predicition of a catastrophe was a fair one.

Background

A hung Parliament is when no single party has an overall majority in the House of Commons. It is almost thirty years since this situation last occurred in Britain. In 1974 Labour formed a minority government but this lasted just eight months before another election was called.

The eight general elections since have all produced a majority for one party. However, with the latest opinion polls consistently putting the Conservatives' lead over Labour below ten per cent, a Parliament with no overall majority is seen as a likely outcome.

The Cabinet Office draft manual explains that governments can operate without a majority so long as they can command the confidence of the House of Commons. The largest party would need to secure support from other political parties either in coalition or through informal agreement to pass key legislation such as the Queen’s Speech and the Budget.

This arrangement can continue until the Government loses a vote of confidence, at which point there would be a change of Prime Minister or new elections would be called.

The markets

Mr Clarke’s comments come after the deepest recession since the Second World War that has seen a huge rise in government borrowing. The next government will be under pressure to secure economic recovery and balance the budgets.

Some financial analysts have warned that a hung Parliament will lead to political instability and delay in taking necessary action to tackle the budget deficit.

Michael Saunders, head of European economics at Citigroup, exemplifies this position.

“A hung Parliament would likely be highly unstable and would therefore make a credible programme of fiscal restraint extremely unlikely,” he says in March’s UK election update for investors.

There is further concern that a hung Parliament will make a second election much more likely. The logic goes that the new Prime Minister will return to the polls at the first opportunity to try and secure an overall majority, causing further upheaval and delay in introducing a fiscal consolidation programme.

“If the UK election produces a hung Parliament, then politicians are likely to stay in pre-election mode, anticipating another election in the next year or two,” Mr Saunders claims.

Since Christmas the value of sterling has been falling measured against the dollar.

Figure 1 (Source: BBC)

At the beginning of March the pound dropped below $1.50 for the first time since spring last year, as Figure 1 shows.

Some commentators cited this as evidence of market jitters about a hung Parliament. The economics editor of the Telegraph Edmund Conway went as far as to ask if this was the start of a sterling crisis.

But it is not clear how easily these falls can be ascribed to expectations of a hung Parliament.

The polls certainly narrowed in the same period (see UK Polling Report). A Sunday Times poll at the end of February gave the Conservatives just a two point lead over the Labour party (37 per cent to 35 per cent).

Yet, it was acknowledged that the markets were also affected by the announcement that Prudential PLC would spend $35.5 billion buying AIA, the Asian arm of American International Group. The move would have involved substantial selling of pounds to buy dollars. Such an announcement may have also contributed to the fall in the value of sterling.

Reflecting on the news, Mr Conway later said: “Trying to identify precisely how much of the day’s fall is corporate, how much due to political news and how much noise is something of a fool’s game.”

John Stepek, editor of Money Week, told Full Fact that the current political situation was adding to a sense of uncertainty in the markets.

“Markets don’t like uncertainty. If one party was set to be a clear winner, markets could prepare for that outcome,” he said.

“But that is not to say that if we get a hung Parliament after the general election the pound is going to go through the floor.

“The markets have twigged that [a hung Parliament] is a possibility and have begun to price this uncertainty into the decisions they make.”

Mr Stepek said that while it was reasonable to see a correlation between the likelihood of a hung Parliament and the value of sterling in the currency markets, many factors are at play.

He highlighted the fact that the dollar is getting stronger this year on the back of the US economic recovery and this will also have contributed to the fall in the value of sterling.

UK experience

Markets are unfamiliar with multi-party governments but history shows that ruling by minority or coalition governments is not uncommon.

Britain has been governed by coalition or minority governments for 34 of the last 100 years. The period between 1910 and 1922 was one example. The Liberals led a minority government from 1910 under Herbert Asquith. During the First World War opposition members were brought into a Liberal-led coalition which continued until 1922.

A National Government was formed in response to the economic crisis of the 1930s under Labour Prime Minister Ramsay MacDonald and a National Government under Winston Churchill led Britain to victory in the Second World War.

The fact that cross-party government outlasted each crisis they faced suggests they were effective governments.

The Hansard Society's recent report on hung Parliaments argues that: “Political decisiveness is linked to a government’s capacity to legislate and here too the precedents demonstrate that a hung Parliament can still deliver.”

It points to the hung Parliament of 1974 as evidence. In that calendar year, despite two general elections 58 bills became law – a similar amount of legislation as previous and successor governments passed.

International comparisons

The tendency in the UK to have single party governments is unusual compared to other democracies. In Germany, Europe’s biggest economic power, coalition government is the norm. In most other European countries proportional representation systems make the chances of any party winning an overall majority slim and coalitions are commonplace.

An OECD study into fiscal consolidations since the 1970s showed that seven of the ten largest government actions to reduce deficits took place under coalition or minority governments. These were Belgium (twice), Denmark, Finland, Italy, Norway and Sweden.

International experience suggests that a hung Parliament does not need to affect the proper functioning of government or prevent strong economic action from being taken to address crises.

Perspectives on the market

All discussions on how markets will react to a potential hung Parliament include a degree of speculation.

The Hansard Society’s Ruth Fox is adamant that: “Markets have no reason at all to be concerned about a hung Parliament.

“The operation of government in this period is no different to the rules that exist during an election campaign. If markets have nothing to worry about during an election, they have nothing to worry about during this period of negotiation.”

Ms Fox also stated the belief that cooperation between the political parties to stablise the fiscal situation could actually be better for Britain’s financial position.

“On deficit reduction the direction of travel is pretty clear. Considering the economic decisions we are facing if the political parties act in the spirit of the national interest, more collective decision making and shared responsibility could produce a more stable outcome.”

Mark Littlewood, Director General of the Institute of Economic Affairs, offered a different perspective. He said markets were right to be very concerned about the future, but that contrary to Mr Clarke’s claim, the greatest financial risk is not posed by a hung Parliament.  

“The real acid test for the markets is not May 7 [the expected day after a general election] but the delivery of a serious programme of cuts in an emergency budget afterwards.

“It is not obvious that any of the major parties are serious about tackling the deficit at all.

Mr Littlewood said market concern over a hung Parliament was still legitimate, but only marginally compared to the much bigger issue of a credible deficit reduction plan.

“There seems to be an assumption that if there is a hung Parliament the next government won’t be able to cut the deficit, but that a majority government will. This is a false premise. “

Conclusion

Whatever the reality of market behaviour, and that is impossible to predict before it happens, it seems that uncertainty currently predominates. Ken Clarke is echoing the view of some concerned voices in the financial sector. However, it is certainly not the only view about how markets can, should and will behave.

It is not simply the prospect of a hung Parliament that appears the cause for market concern. It is the belief that prolonged instability will delay necessary action to tackle the budget deficit.

Hung Parliaments do not necessarily lead to weak government, as international comparison shows. Strong action can be taken. Everything will depend on the decisions and calculations made by political leaders.

By Tim Swain