2Es in UK - Election and Economy

At this point, it appears to be anybody’s game with strong likelihood of a ‘hung parliament’ outcome, in which no party has a majority and a government is formed through backroom haggling.

Until 2008, the British economy looked to be in decent shape. Once the pound was allowed to float downward in 1992, the economy never looked back. From 1992-1997, Britain had the best-sustained growth in Europe but very sloppy about public spending. It was allowed to rise and the increase accelerated after 2000 as the Labour government elected in 1997 settled in and started implementing its wish list. British public spending, which had bottomed out at around 38% of GDP in 1989, Thatcher’s last full year – would actually exceed 50% of GDP by 2009. What more, tax revenue was allowed to fall behind, so that in 2007-2008, a boom year, Britain still ran a budget deficit of 5.3% of GDP. The other problem was that the economy became increasingly dependent on revenue from the City of London financial district. Needless to say, that is why there is a problem now.

In fact, a budget deficit of 12% of GDP is now nearing Greek territory and with the financial services business itself may get smaller and house prices in Britain yet to adjust as fast as its counterpart US, which could well mean that there are more huge losses to come in the housing-finance sector.

The expansion of government was twice rewarded with thumping election victories – one in 2001 and the other in 2005. Only now when disaster has occurred, is there any possibility of change? BOE Governor Mervyn King recently said that the party that wins this election would become so unpopular because of the policies it was forced to introduce that it would be out of power for a generation. I tend to agree!

The possibility of any reformer to be tossed out of office after one term is high as the eventual outcome of this long and painful story will either rebuild the country or else the probability of an eventual British default on debt to be high. In short, Britain is country in a great jam and it is going to take strong leadership and wisdom to fix its problems – possibly another Margaret Thatcher to leave a lasting legacy.