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Alexander: Markets need stable government

April 24, 2015 9:35 AM
Originally published by Scottish Liberal Democrats

The City fears an economic lurch to the Right or Left, Danny Alexander warned today.

In a speech in Aberdeen, the Liberal Democrat Chief Secretary to the Treasury said Britain's investment banks, rating agencies and economists are concerned by a Tory or Labour Government.

He said Britain's markets craved the stability and balanced economic approach fought for by the Liberal Democrats over the last five years.

It comes as the Liberal Democrats release a dossier highlighting fears expressed by the City of an unstable Tory and Labour Government.

The dossier revealed markets fear a Labour Government would:

  • Cost the economy more than £10bn-a-year as growth decrease by 0.6 of a percentage point (pp).
  • Cost the average household at least an extra £800-a-year in mortgage payments as interest rates jump 0.7pp.
  • A 1pp in gilt rates would increase the cost of government debt interest by over £4bn.

While a Conservative Government risking 'Brexit' would:

  • Reduce economic growth and threaten the UK credit rating.
  • Threaten UK, trade jobs and business investment.
  • Negatively affect markets and increase the cost of Government borrowing.

Full text of Danny Alexander's speech

'May you live in interesting times' - this often quoted line is apparently supposed to be a curse rather than a good wish. Well, I can testify that the last 5 years as Chief Secretary to the Treasury have certainly been 'interesting' times. And I wouldn't wish the problems I've had to face as Chief Secretary to the Treasury on any of my successors.

In 2010, it was clear that the UK government would face huge economic challenges. That is also true at this election. Today, I would like to talk about the economic and financial consequences of this election. It is clear that neither Labour nor Conservative parties will achieve a majority. So the key question is who holds the balance of power, and what sort of government emerges afterwards

The markets are showing their concern. I believe they are right to do so. An unstable government, unable to take serious decisions, pulled sharply to left or right, with Alex Salmond or Nigel Farage, would cost us all dear. It would jam the breaks on the economic recovery

As the market commentary makes clear, such an outcome would lead to higher costs of government borrowing-an estimated £4bn more in debt interest, mortgage costs rising by an estimated £800 a year, and a weaker pound. That would be an economic disaster for Britain, and an insult to the massive effort and the many sacrifices made by millions of people and businesses who are powering our recovery.

But it doesn't have to be like that. Liberal Democrats have shown in the last 5 years that there is another way, where the party that holds the balance of power can make government stronger and more effective.

When the history books are written about these last 5 remarkable years, I believe they will come to some remarkable conclusions. And the most remarkable will be this. That our country fought its way back towards economic health, not despite the fact that there was no clear winner in the general election of 2010 - but because there was no clear winner in 2010 and the country had the benefit of a strong, stable and bold coalition.

Liberal Democrats stepped up to the plate, entering government for the first time in 70 years, to ensure that we put in place and stuck to a firm, balanced, fair plan to turn our economy around.

At times of economic uncertainty, financial markets often see a 'flight to safety.' Investors looking for the best place to avoid the coming storm.

In these final two weeks of electioneering, the flight to safety will be to the Liberal Democrats. People seeking to ensure that out of another hung Parliament comes an economic policy rooted in the centre, sticking to path we are on, not lurching away from it, will come back to the Liberal Democrats. We have been key to the country's economic progress in the last 5 years. We are the keystone of economic stability in the next 5 years.

And haven't we needed the strength and resilience of the Liberal Democrats and the coalition to take on the challenges of the last 5 years. It's worth remembering how bleak things looked in 2010. We had the largest peace time deficit on record, and no plan to fix it. Uncertainty and apprehension stalked the country. People feared for their jobs. The international outlook was dire. Britain was on the brink.

Compare that to now. Record numbers in work. Strong growth - the strongest of any advanced economy. Low inflation. And, just as important as those positive statistics, we can see and feel confidence returning. Compared to the starting point in 2010, most observers see this as remarkable progress. We have travelled a long way down the road of recovery. Millions of people and businesses have worked very hard to get us to this point.

But the fact that we have come so far means there is so much more at stake as we approach this general election. There is a danger that people can be lulled into a false sense of security. Yes, the statistics are good. Yes, things are much, much better than they were in 2010.

But the depth and scale of the problems we inherited were great. We still have more work to do to balance the books, and do so fairly. And then more work after that to reduce our national debt as a share of the economy. We still have the largest structural deficit in the EU. We are still borrowing £75bn a year to pay for our public services. We are still increasing the size of our national debt, and will for years to come.

So the next government will have to eliminate the structural deficit, do so fairly, and at a good pace, not dragging the pain out for too long. The next government will have to be a position to make long-term choices to support economic growth, to back key industries like oil and gas here in Aberdeen and invest in infrastructure and skills, not be forced to limp from one short term parliamentary crisis to the next.

The next government needs to lead economic reform in Europe, not be held hostage by politicians in UKIP and the Tory party obsessed by leaving it. The most pressing responsibility of the next government will be to secure this recovery. To do that, we need stability and we need to stick with the common sense and balanced plan that has got us this far. That is what Liberal Democrats, and only Liberal Democrats can provide.

You will have heard the oft spoken mantra that 'all politicians are the same'. Maybe some of you have said that yourselves. But the choices facing the British people this time put paid to that notion.

There are pretty fundamental differences between the parties on the economy. And something else is different too. There are more Parties potentially in the mix.

And it is clear to most people, from the opinion polls, the betting markets, and the City analysts that the choice at this election is not between David Cameron and Ed Miliband. The truth is neither of them are on track to form a majority government on May 8th. Desperate Dave and Muddled Miliband will not admit it but the only way either of them will become Prime Minister is by working with other parties.

That is the real choice in this election, who do the people of the United Kingdom want either David Cameron or Ed Miliband to work with, and importantly how should they work together.

The last 5 years has proved the doubters about coalitions wrong. 5 years ago, George Osborne said a hung parliament would 'bring the economy to its knees' and 'send interest rates soaring'. Mortgage rates are now at record lows. 5 years ago John Reid said coalition would be 'inherently unstable'. The Coalition Government lasted its full term. 5 years ago, Ken Clarke said "I don't think the bond markets will wait for the discussions and horsetrading'. He was proved wrong too.

So now, with many more Parties in the fray, it's vital that people have a clear understanding of the economic consequences of the alternatives on offer: Blukip, NatLabour, or stable government with the Liberal Democrats.

But before doing that, it's worth reflecting on the big difference between a coalition government and a more informal arrangement in which a government has no majority and has to rely on support from other parties on a vote by vote basis. Our coalition government was successful because it was strong.

The political-will to stay the course for the greater good was the strength of the coalition. Currently, Labour are ruling out formal coalitions with the SNP. The Conservatives say they are ruling out formal coalitions with UKIP. But that leaves the door open to other less stable arrangements. Support would be sought issue by issue, vote by vote. A government on life support day by day, vote by vote, with Alex Salmond or Nigel Farage constantly threatening to switch it off. This is even more worrying when you look at the motivations of the smaller parties.

Let's look first at the nationalists. We don't have to look far to understand their ultimate aim and what drives them. The clue is in the name. However they try and mask it, their purpose is to tear the United Kingdom apart. No matter how attractive in the short term to the Prime Minister sustained in office by such an arrangement, it is the long term security and prosperity of all the people of these islands that will suffer. Nicola Sturgeon has said that she will help Mr Miliband into No10. A weak Mr Miliband, balancing on a precarious parliamentary arrangement with wily, unreliable nationalists would lead to uncertainty and risk as economic policy was pulled to the left and the government had no ability or will to take the difficult decisions.

The risks are just as great on the right. Blukip, as it is becoming known, is the chilling name being given to any arrangement between the Conservatives and UKIP. As in the days of John Major, this would see David Cameron in office, but not in power, as his UKIP partners and their friends on the right of the Conservative party would suck out more and more concessions and drive the country ever further down the route of Brexit. Britain would lurch to the right, away from the sound, sensible, balanced plan that has brought us this far.

On their own, the Conservatives would to finish the job of balancing the books unfairly with cuts to the working age poor and to public services. In cahoots with UKIP, they pose a serious threat to Britain's place in the EU. On their own, Labour have no credible plan for the economy. In cahoots with the SNP, they will be pushed into ever greater borrowing and debt, repeating the mistakes of the past.

These scenarios are real possibilities, for which we would all pay a real price. Already we are seeing the markets warning of the dangers. Today I am publishing an analysis of market reaction towards the election. We're already seeing the pound affected.

As Daragh Maher, a currency strategist at HSBC said, "You're seeing the first signs that some political risk has been priced into sterling." The bond market is also showing concern, the bid-to-cover ratio (demand in the auction as a ratio of the supply) for 25 year index-linked bonds hit 1.4 last week, compared to 1.9 in August last year.

Now that might be down to the specific issuance, or as Andy Chaytor, head of European interest rates strategy at Nomura comments, it could be the political risk of a weak government after 7th May.

Blackrock have said that any backtracking on the pace of deficit reduction by a Labour government 'would likely lead to a temporary sell-off in gilts'.

Goldman have said that market concerns over budget discipline 'could lead to a rise in Gilt yields'.

Whilst Investec Management have said that the uncertainty about potential EU referendums may also result in 'raising Gilt yields'.

Business investment would be affected too. A survey by ICAEU revealed that 52% of those asked said that uncertainty around the election was a factor in dissuading them from reinvesting. That's action, by markets and businesses. Their reaction to the instability that is already apparent. That market reaction is a warning to voters.

Put simply the idea that an unstable minority government would have the confidence of business and the markets is for the birds. A minority government seeking to introduce measures to reduce the deficit would be challenged at every turn. Government ground to a halt. Lowest common denominator politics.

Some people may see this as attractive, but this misses the massive macro-economic consequences of failing to address our economic challenges. In these circumstances, it is not unrealistic to think business investment would seize up, that foreign direct investment would go elsewhere, that the once 'safe haven' of the UK gilt market would suddenly look significantly more risky.

Or as Goldman Sachs recently remarked:

"Concerns over budgetary discipline, if left unchecked, could lead to a rise in Gilt yields."

And so the consequences would be marked, not just for businesses, not just for the Government's cost of borrowing, but also for households as interest rates rise and the cost of mortgages increases.

Ross Walker from the Royal Bank of Scotland made the point in a different way:

"'England does not love coalitions' opined Disraeli - something seemingly borne out by polling data a century-and-a-half later - but a minority government might well prove an even less desirable outcome for markets. UK political risk looks under-priced.'

Let's look at what the City is saying about the future. Merrill Lynch have said that a 'left wing coalition around Labour' would 'trigger a deterioration in potential GDP growth'. Andrew Smithers, founder of Smithers and Co, has said that a Labour government supported by the SNP would 'entrench the structural problems of the UK and slow its trend growth.' Deutsche Bank have said that the Conservative's proposals for an EU referendum would have 'negative consequences for both investment and sterling'. Whilst International Finance Magazine have said that the prospect of a Conservative/Ukip coalition would 'frighten many investors and businesses'.

In short, a paralysed government would soon lead to a paralysed economy.

'Rising gilt yields' is market speak for higher interest rates. A departure from the balanced approach that the Coalition has taken will lead to a rise in an interest rates by at least 0.7% This would cost the average household an extra £800 a year in mortgage interest payments. That's a high price for millions of families to pay.

The value of Sterling hit. Rising bond yields costing billions more in interest payments every year. An estimated £4.2bn more in the cost of debt interest if gilt yields rise by just 1%. That is the price of weak government, dragged further to right or left, abandoning the economic plan that has got the country this far. It is a price that every person and business in this country would pay.

How can we avoid these dangerous outcomes? The answer is the Liberal Democrats.

We will ensure our country doesn't lurch to left or right, but sticks to the centre ground. We have shown that we can deliver strong and stable government, and not allow or country to be pulled to the extremes or be paralysed with indecision.

There needs to be a plan to rebalance our economy. There needs to be a plan to further reinvigorate our infrastructure. There needs to be a plan to boost the life chances of every child in the UK, not just those who are born into privilege. And yes, there needs to be a plan to balance the books, in a responsible way, in a fair way, in a way that allows us to invest in our public services and reduce the debt burden. That is our plan.

Five years ago, my Labour predecessor left a note on my desk which said 'sorry, there's no money left.' I finally got round to replying today. It says: 'Sorry for the late reply-I've been busy fixing the economy. 'The deficit halved, jobs up, growth up. That's the Lib Dem record. We won't let you-or the Tories screw it up.'

And that is why is why the country needs as many Liberal Democrat MPs in Parliament as possible come May 8th. We have a track record of strong government. We have a track record of stable government. We have a track record of delivery. A vote in this election for the SNP or for UKIP is a vote for instability. Neither Desperate Dave nor Muddled Miliband can win a majority.

That is why you need Lib Dems as a part of the next government. The heart in a Conservative coalition. The head in a Labour coalition.

A strong economy and a fair society. Ensuring our country has the opportunity to move from rescue and repair, to economic renewal, so that our people and our businesses have the best opportunity for the future.