Britain is facing a massive budget deficit and this is the big issue that is facing the economy. The Labour Party was the party least willing to admit to the parlous state of the public finances. Investors have already priced in a Labour victory. So a government with Labour as the dominant party would be unable to deal with the crucial issue that is facing the British economy. Well that would make sense, but as so often is the case with politics what makes sense is not always what happens.
In the UK the Conservative party has the reputation for competence but heartlessness. If the Conservative party were to say that something had to be cut then a lot of people would simply not believe them. Labour could quite simply point to a tax loophole (despite the fact that low taxes on the wealthy increase the long term tax take) or an inefficiency (although inefficiency is more a function of the size of the state) and say that these could make up for an unpopular cut. This playground politics could bring the country to a halt as the Liberal Democrats get more and more scared and the Tories are uncomfortably aware that they do not have a mandate for cuts.
So here are some value spread bets:
- We feel uneasy saying this but a Labour-Liberal coalition is oversold as Labour will offer the Liberal Democrats anything and the nationalists have advertised that they can be bribed.
- If Labour do come in buy the pound and the stock market after the inevitable dip. Labour knows that it has to deal with the deficit, no matter what it told its supporters in the election.
- If the Tories pull off the coalition, and even we admit that they are more likely to do so, sell the pound and the stock market after the inevitable rally.