Will hung parliament lead to IMF bailout?
The claim
“If the British don’t decide to put in a government with a working majority and the markets think that we can’t tackle our debt and deficit problems, then the IMF will have to do it for us. That will be the view outside.”
Ken Clarke, Shadow Business Secretary, 21 April 2010
The background
In a press conference earlier today Ken Clarke warned of dire consequences in the financial markets if the election resulted in a hung parliament.
According to Ken, the market reaction could force the UK to go cap-in-hand to the International Monetary Fund for a loan, just like Greece is having to do now.
Pressed by Channel 4 News, the shadow chancellor, George Osborne, backed Mr Clarke’s comments, saying that the last time the IMF came in was when “the governing party did not have a workable majority in parliament” in the late 1970s.
Mr Osborne added that people needed to be aware of the consequences of a hung parliament: “I don’t think people should underestimate the economic consequences of political instability in their country when at a time when we are running one of the largest budget deficit in the developed world, when people have questioned our credit rating and when you can see there is a very serious problem with unemployment and business confidence.”
So should British voters be worried of the economic consequences of a hung parliament, or is it just political scare-tactics?
The analysis
Britain is unusual that in it rarely has a hung parliament – the last time one was elected was in 1974. But countries like Spain, Germany and Holland regularly return a minority government.
In fact, Professor Luis Garicano of the department of management at the London School of Economics, says that the claim that a hung parliament could spook the markets to the extent that an IMF loan is needed is an “absurd proposition”.
“I’m very surprised that the press are so insistent in this point,” says Professor Garicano. “It’s not going to make any difference from the outside. I think every foreign economist is flabbergasted by the suggestion.”
Professor Garicano says the real concern of the markets would be the progress of the new government in reducing the deficit and adds that the UK is fortunate that the three main parties are well regarded internationally and similarly-minded on economic issues.
Professor Garicano’s assessment is supported by another academic, Professor Philip Booth of the Institute of Economic Affairs. He says the three main parties’ approach to tackling the UK’s debt and deficit are “more or less the same”.
Professor Booth echoes Professor Garicano that the main issue influencing whether or not the IMF will be called in will be the new government progress in tackling the deficit. But he adds this is a medium term problem that won’t be affected by short-term political instability.
Professor Booth also casts doubt on the influence of political instability on the problems that led to the Callaghan government’s approach to the IMF in 1976. He says it actually was the result of years of financial mismanagement by both Labour and Conservative governments.
The verdict
While markets don’t like uncertainty, our economists agree that having three main parties with similar economic outlooks provides some degree of stability.
So despite the Conservatives’ insinuations, a hung parliament would not lead directly to an IMF bail out. In the words of Professor Booth, this particular Conservative claim is a “red herring”.
But – as all of this is opinion not fact – FactCheck will wait to see what happens post May 6th before declaring fact or fiction.
There are 10 comments on this post
I’d be more impressed with your analysis if instead of asking professors you’d asked the people who actually buy treasury bonds. Try again.
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Yes! ….and i’d like to be able to hedge my bets that way too against who and what goes in and what comes out of the revolving doors at Whitehall and Westminster, perhaps as private pension funds do …. and public might if not funded from current income to and abated pay by central and local government?
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I don’t know why we’re surprised Osborne is scaremongering again – he does it because he finds it hard to articulate his arguments with real substance – esp when compared to Darling and Cable. Frankly I find it offensive Cameron put him on their election card (excuse my Americanism!) – I imagine it’s because they ‘enjoyed’ each others company at Bullingdon.
It sums up the Conservatives campaign – unfortunately its that well funded that it gets about a bit. Twisted facts, naive ‘style’ policies, little substance = all being presented by petty little seedy men who hold about as much in common with Mr & Mrs Average as the pompous historical class they used to/do stand for.
As Cable said “scaremongery of the worst kind”.
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It’s the return of political parties to power at Westminster, especially if absolute, which is putting this punter off as much as the interest laden deficit and the principal debt which – excluding that off-book – will inexorably rise towards matching GDP at £1.4 trillions during the life of the next parliament.
Should they be left to cope without our helping them decide how we are to help each other do as we would be done by?
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Ken saying it like it is – I don’t think so! They are rattled because they’ve always assumed that they are the next government; now they are finding out that TV debates – which they pressed for, for so long – cut both ways. As John Major noted in his autobiography, Ken can be wilful especially under provocation; he’s not changed. Poor old Osborne – a cuckoo in the nest
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Denis Healey was forced to beg from the IMF in June, 1976 – over 2 years into the Labour government. The Lib/Lab pact didn’t happen until 1977, by which time by-elections meant Labour no longer had a majority – and it folded in 1978, although Callaghan hung on until 1979 when the first Thatcher government was voted in to clean up the mess. Healey had been forced to raise Bank Rate to 15% in October, 1976.
I hope you allow a decent interval before proclaiming that the IMF has or hasn’t been called in. Sometime next year we might hit a crunch, when some of the Bank of England bailout money has to be repaid by banks.
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Of course, if true this implies that regardless of who we vote for, public spending will follow the money-terrorist agenda. So as we have no choice on how the economy will be handled, we should choose on other criteria – ie parliamentary sleaze, PR, foreign affairs etc. “Vote for this because you’ll get it anyway” doesn’t sound like a great slogan, particularly while the parties are pretending to take the voter seriously (ie until May 6).
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The main issue- though a hidden one- of a a hung parliament, is that the present prédominant groups of ex-public schoolboys in the main parties will no longer be able to pursue their new colonialist, anti European, obeisantly pro-American policies through a single unopposed party. A hung party would mean that such policies would no longer hold sway: parliament progress would- thank God- come about only with a dilution of these.
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The fear of a hung parliament is because (as has been suggested elsewhere in the comments here) the Party in power will not be able to railroad through it’s policies. Instead they would have to negotiate and deal and debate. MPs would have to work hard to push through new policies and laws, with proper political debate, which we haven’t seen here for some time. Given the current economic mess, a hung parliament would help us develop some properly considered policies to combat the situation. And, let’s face it, when one votes for a Party now it’s going to be on the basis of a part of the manifesto that one feels sets them apart, yet you have to take the rest of the ‘baggage’ wether you like it or not. So even in a majority parliament the manifesto is only a compromise from the POV of the man in the street.
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[...] Channel Four’s Fact Check says “no”; so does CentreForum’s chief economist Giles Wilkes. [...]
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