The current political situation in the UK is delicate. Fortunately, by contrast to the often calamitous moments of the Johnson and Truss eras of governance, political risk is being somewhat overlooked. We are likely in an election year in the UK, at least that’s what the Prime Minister has recently told us. A general election legally must take place by 28th January 2025, with the incumbent government responsible for calling the election date. That is of course unless Parliament was to pass a vote of no confidence first. Whilst legally possible, this is hugely unlikely and will not be factored into most base cases. The PM has already suggested the second half of the year for the vote to take place, which should be unsurprising given the Conservative Party’s trailing performance in the polls.
As the PM puts it, there’s a busy schedule ahead and he wants to get on with the job at hand (read: before he likely loses it). As is plain to see, it’s a bid to make some political progress and popular concessions in an attempt to shift the polls before the electorate heads to the ballot box. We will continue to see increased speculation and debate surrounding the date and expected outcome of the election as it inevitably draws closer. We all know the risks that a change of government can bring to a currency. But there is a significant risk that fiscal promises from the incumbent government to boost their favour with the electorate before declaring an election may undermine GBP in the meantime.
The government will be seeking to enact policies that maximise their chances of another term in office. Based on just how far behind in the polls they are and sentiment towards the current government, that looks like no small feat. So how do you win favour with an electorate? Well, the easy and fast way is to cut taxes and boost spending – and there isn’t any time now for non-fiscal party tricks this late in the game. There is a risk that these efforts that are already under consideration and have already been hinted towards turn Sunak’s supposedly fiscally responsible government into one that resembles Truss’ failed fiscally expansionary government. We all recall Truss’ mini budget causing UK fixed income prices and the Pound to collapse which ultimately enabled Rishi’s more fiscally conservative brand of politics to be ushered back in. A genuine risk to GBP for this year is whether the inflation problem and market uncertainty has sufficiently healed in order to accommodate the inevitable fiscal promises of the incumbent government and that which wins the next mandate to govern.
Discussion and Analysis by Charles Porter
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