The Unelectables: UKIP victory points to UK Government instability in 2015
Yesterday’s by-election victory by the UK Independence Party (UKIP) points to instability in the lead up, and following
the 2015 General Election and reduces the prospect of meaningful economic reforms in the UK. Voting in the Scottish
Referendum, Clacton-on-Sea and now in Rochester signals that the three major UK parties have become individually
unelectable – so from May 2015 the UK faces a further period of coalition or minority government. This weakens the
medium term growth prospects for the UK economy by reducing prospects for structural reform, deficit reduction and
political stability. We therefore reduce our outlook for Sterling – with referenda on the future of the Union or Britain’s
EU membership expected to act as the makeweights in any coalition agreement.
UKIP – The task gets harder from here
Despite its recent success UKIP remains a party of protest. It has neither a stable support base nor a broad and credible
policy portfolio. On taxation, healthcare and welfare reform – where the UK faces the biggest challenges from an ageing
population – the UKIP position is wafer thin and will be exposed in the lead up to the General Election. We expect the
creation of a UKIP manifesto will split the currently unstable coalition of left and right that makes up the UKIP support
base. The speculation surrounding the position of the current UKIP Economy spokesman, Patrick O’Flynn, an advocate of higher taxation, is indicative of this issue. Deep divisions between his views (which are aligned with a significant minority of UK supporters) and those of major UKIP donors will come to the fore over the next six months and should act to stem the UKIP surge.– An art not a science
So where does this leave UK politics ahead of the 2015 General Election? Neither the Conservatives nor Labour have
sufficient support to achieve a parliamentary majority and must look for coalition partners. It is often forgotten that even after polling 29% in the 2010 Election, the Labour Party were in pole position to enter a coalition until botched
negotiations with the Liberal Democrats pushed together the current coalition partners. The likely composition of a 2015 coalition is highly unpredictable given the nature of these post-election negotiations which have as much to do with personality as politics. While the current coalition has been remarkably stable, the unifying driver of post-GFC deficit reduction will be diminished this time and reduces the prospect of a stable five year parliament.
“Scexit” or “Brexit” – The price of power
The Scottish National Party (SNP) are projected to win over 40 seats at the next General Election and have overtaken the Liberal-Democrats Democrats as the party most arithmetically suited to enter coalition with the Labour Party. We anticipate that the SNP terms would be a second Scottish referendum with “devo max” on the ballot paper. While too easily dismissed as a sticking point for Labour, the current leadership will not enter such negotiations from a position of strength. By contrast if the Conservatives strike a deal with UKIP – who are likely to be short on MPs but will act as a major barrier to the Conservatives achieving a majority – the terms will be a 2017 “in-out” EU referendum followed by a second General Election with UKIP limiting their campaigning in marginal Conservative constituencies. Under either scenario outlined above, or indeed a minority government, we see a return to the polls well ahead of May 2020 and the resultant uncertainty weighing on UK financial markets.