In what Goldman suggested was "the most market-friendly" outcome, [8] UKPolls reports that the Conservative Party leads the UK election (based on exit polls) with LibDems taking enough seats to enable a majority coalition. UKIP managed a disappointing 2 seats. Cable is rallying on the back of this (though we note this is exit polls only).
[9]
With 326 seats required for a majority:
- *U.K. VOTES: TORIES SET TO WIN 316 SEATS: EXIT POLL
- *U.K. VOTES: LABOUR SET TO WIN 239 SEATS: EXIT POLL
- *U.K. VOTES: SNP SET TO WIN 58 SEATS IN SCOTLAND: EXIT POLL
- *U.K. VOTES: LIBDEMS SET TO WIN 10 SEATS: EXIT POLL
- *UKIP 2 SEATS, "GREENS" 2 SEATS, OTHER 19
A projected GB-only electoral map using @May2015NS [10]'s model, based on the exit poll #GE2015 [11] http://t.co/8Fu11S4HJI [12] pic.twitter.com/T3ILLLBggm [13]
— New Statesman (@NewStatesman) May 7, 2015 [14]
Here are the possible outcomes (along with SocGen's probabilities)... It appears Box (6) is the most likely now...
[15]
and here is Goldman, simplifying the decision process to three potential outcomes. While there is a whole range of potential outcomes to the May 7 election, each of the most likely governmental combinations falls into one of three broad groupings:
1. A Conservative-led government (either on its own or in coalition with the LibDems). This is likely to be perceived as the most ‘market-friendly’ outcome, partly because it would come closest to maintaining the status quo and also because the Conservatives’ stated aim is to reduce the budget deficit through cutting current expenditure rather than by raising taxes. Set against this, the Conservatives’ commitment to hold a referendum on EU membership by 2017 and the increased risk of exit would likely be negative for investment spending and UK assets.
2. A Labour-led government (either on its own, with the implicit support of the SNP, or in a formal coalition with the LibDems) would shift the balance of further fiscal adjustment away from spending cuts to tax increases. Labour’s proposals include: raising the top rate of income tax from 45% to 50%; raising the headline corporation tax rate from 20% to 21% (offset by measures designed to help small businesses); increasing the ‘Bank Levy’ on banks’ balance sheets, applying a second ‘one-off’ tax on bank bonuses, removing the non-domicile tax status and introducing a ‘Mansion Tax’ on residential properties worth more than £2 million. At the same time, a government of this complexion would be less likely to contemplate a referendum on Britain’s EU membership.
Of the potential Labour-led government combinations, financial markets would likely respond more favourably to a Labour/LibDem coalition than to a minority Labour government supported by the SNP on a confidence and supply basis. (The Labour party has ruled out a formal coalition with the SNP.) In this scenario, concerns are likely to emerge that reliance on the SNP would pull the Labour government away from the centre to the left of the political spectrum, as well as raising the spectre of distributional policies favouring Scotland at the expense of the UK as a whole.
3. It is also possible that there will be no clear outcome to the election. If no party (or coalition of parties) is able to form a stable government, a second election could be called shortly after the first or a minority government might attempt to struggle on. Again, the lack of clarity surrounding such an impasse would likely be damaging for UK growth and assets.
* * *
The Bottom Line is that at the macro level the implications of the election may be less pronounced than many anticipate. Monetary policy has been de-politicised through the Bank of England’s independence. Moreover, the formation of a coalition government is likely to involve convergence towards centrist positions, while a minority administration that pursues policies outside the mainstream would be unlikely to survive given its fragile parliamentary basis. In either case, the political system is unlikely to deliver radically different macroeconomic outcomes.
* * *
David Cameron is on course to remain prime minister at the head of a minority government after the U.K. general election, an exit poll showed. The pound jumped.
The prime minister’s Conservatives were forecast to win 316 of Parliament’s 650 seats, with Ed Miliband’s Labour Party trailing on 239 seats, according to the survey of voters published shortly after polling stations closed Thursday.
The forecast, based on interviews at voting centers in 140 districts across Britain, put the Scottish National Party in third place with 58 seats and Deputy Prime Minister Nick Clegg’s Liberal Democrats fourth with 10, almost wiping out the 57 seats they won in 2010.
“We haven’t had an incumbent government increase its majority since 1983,” Conservative Chief Whip Michael Gove told the BBC. “If it is right, it means the Conservatives have clearly won this election and Labour has lost it.”
It appears Scenario #1 is most likely now and cable is loving it
[17]