geopolitical risk ratings firm

United Kingdom – Unexpected Majority Lifts Confidence

In a result that can fairly be characterized as shocking, Prime Minister David Cameron’s Conservative Party won an outright majority of seats at parliamentary elections held on May 7, a result that has left the country’s pollsters scrambling to identify the flaws in their models. Ed Miliband, the leader of the opposition Labour Party, proved to be an uninspiring campaigner, and his party suffered bigger losses than expected in Scotland, where Labour lost all but one of its seats to the resurgent SNP. But a Labour-SNP alliance might have provided a way for Miliband to take up residence on Downing Street if, as seemed very possible, the Conservatives and their beleaguered coalition partner, the Liberal Democrats, fell short of winning a majority of seats.
Whatever fallout emerges from the unexpected outcome, which is all but certain to revive the debate over Scottish independence and ensures that the UK will hold a referendum on membership in the EU, the election of majority Conservative government to a five-year term has given pound sterling and asset prices an immediate lift, with the markets wagering on an investor-friendly agenda and comforted by the absence of uncertainty that would have accompanied coalition-brokering and the possible need for a snap election if negotiations failed to produce a viable government.
The retention of Cabinet veterans in key posts points to policy continuity under the new government. Cameron is expected to push forward with the long-term economic plan agreed with the Lib Dems, which will mean further fiscal consolidation without tax increases, the promotion of job creation (in part by means of 3 million new apprenticeships) and labor-force participation (by lowering the cap on benefits entitlements), and reforms aimed at improving the efficiency of public services.
Multi-year reductions in the corporate tax rate are already set in stone, with the top rate already having been reduced from 28% to 20% in 2015/2016. However, it remains an open question as to whether the government will feel it absolutely necessary to reduce the 45% top rate of personal income tax, which remains a controversial issue. In any case, various wealth taxes proposed by the opposition are completely off the table.


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