Political uncertainty and market confidence

30 April 2010

I don’t understand economics, and perhaps there is nothing to be understood. Who knows. Also, I don’t claim to know politics either. But all these talks about political uncertainty and market confidence have started to worry me. In respect to the general election in the UK, the spectre of hung parliament leading to a loss of market confidence hovers over some people’s minds.

Across the sea, coalition governments in the Netherlands and Belgium have collapsed. Yet, there has been no huge impact. While a few economists predict that Belgium may have to pay more to borrow money, it hasn’t caused panic à la grecque. This may seem a bit surprising, since Belgium may (finally) be no more, if the Dutch and French-speakers cannot resolve the current constitutional problems. It’s not just there may be a prolonged period of political uncertainty, but the state could be facing existential questions pretty soon.

It may be the case that the Netherlands and Belgium are doing OK fiscally, hence a bit of political uncertainty does not give too great a cause for concern. The nett borrowing of consolidated general government sector as a percentage of GDP (or, as I’m led to understand, ‘deficit’) in 2009 were 5.3% in the Netherlands and 6.0% in Belgium.

So coalition governments, or lack of governments, do not matter? Perhaps. Perhaps not. The problem may be that whatever happens in the UK, troubles are ahead, and confidence can evaporate quite quickly. The UK deficit figure for 2009 was 11.5%. Only the Irish (14.3%) and the Greeks (13.6%) have worse numbers. So, the UK has borrowed more money relative to the size of the economy than the Dutch or the Belgians. The UK has relatively low debt (or as Eurostat would tell me: general government consolidated gross debt as a percentage of GDP) at 68.1%. That’s more favourable compared to many other states in Europe. Italy leads the way in this respect at 115.8%, closely followed by Greece at 115.1%, then Belgium at 96.7%, Hungary at 78.3%, France at 77.3%, Portugal at 76.8%, Germany at 73.2%, Malta at 69.1%, and then the UK.

The Irish have showed the will to grapple with the problem, but there have been many mentions of PIGS (Portugal, Italy, Greece and Spain) whose credit ratings have been or may in the near future be downgraded. How does the UK compare with them? The following is a table based on the 2009 figures.

Comparison of deficit and debt
Country Deficit (% of the GDP) Debt (% of the GDP)
Greece 13.6 115.1
Italy 5.3 115.8
Portugal 9.4 76.8
Spain 11.2 53.2
UK 11.5 68.1

Just on these figures, Spain looks comparable to the UK. Of course such facile comparisions cannot be made, since there are many other factors involved in assessing a country’s economy and future prospects. Yet this is a salutary warning to the politicians and the electorate in the UK. Borrowing cannot go on. UK’s credit card may not have reached the limit (total debt that the markets will allow), but its government has been on a shopping spree (deficit).

Whoever forms the next government will need to go slow on the shopping, or cut up the card. This means painful, savage cuts. Dr King, the Governor of the Bank of England, is probably right. Winning this election is a poisoned chalice. Programmes of a thousand cuts cannot be done without pain. But there must be and there will be cuts. It raises an interesting question about what type of government is best equiped to make the politically hard decisions: is it better to have a coalition government which would have polled a substantial number of votes, or is it still best to have a single-party majority, even if that majority is wafer thin and returned on a 30-odd percent of the vote?