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Insurance industry

Britain Needs a New Government: Economic Analysis

Strategic Insights

— 1 min read

Financial markets responded positively to the €750 billion eurozone bailout, leaving the power vacuum in Westminster to take a backseat. However, Gordon Brown's attempt to keep Labour in power sent sterling into reverse and the City into panic. Nick Clegg must now decide whether the Liberal Democrats will form a government with the Conservative Party, led by David Cameron, or a leaderless Labour Party.

The financial markets view a Tory-Liberal Democrat government as stronger and more capable of tackling the deficit than a "rainbow coalition" of Labour, the Liberal Democrats, and minor parties. The biggest issue facing the new government is the economy, jobs, and the UK's record budget deficit of close to 12% of economic output.

Key Takeaways:

  • The Conservative Party and Liberal Democrats propose to cut borrowing dramatically over the next few years, with the Tories wanting to start this year and the Lib-Dems and Labour next, but the end result is more or less the same.
  • The National Insurance debate was a phoney war, with the Lib-Dems wanting to scrap the "jobs tax" when they can afford it, and the Tories wanting to reverse much of Labour's planned rise in National Insurance.
  • A Tory-Lib Dem government could raise VAT to 20% to help plug the black hole in public finances, a move both parties refused to rule out before the election.
  • Combining plans to scrap the National Insurance increase with the Lib-Dem proposal to raise the income tax threshold to £10,000 could persuade the Lib-Dems to agree to immediate spending cuts.
  • Jonathan Loynes of Capital Economics believes that differences on the economy and the need to tackle the budget deficit should not scupper the deal.

Statistics:

  • The UK's record budget deficit is close to 12% of economic output.
  • The UK's national debt is headed towards £1.5 trillion.
  • The record budget deficit is £163 billion per year, and the national debt is racked up by Labour.
  • The Tories want to make £6 billion cuts this year, to reverse much of Labour's planned rise in National Insurance.

Sources:

  • Byline: Hugo Duncan
  • Financial markets

Note: The original text does not mention specific sources, so the "Sources" section has been left empty.

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