Let's assume, just for a moment, that the election is over. We have some sort of new government in place and economics have now replaced politics as the burning issue. We are in the short window between the transfer of power and the unveiling of economic policies and, in particular, the disclosure of what the new government will do about the deficit. What now?
There will, after the election, be a period in which the government is allowed to settle. Up to now the world's financial markets have taken the view that as soon as the election is over the next government will come forward with credible plans. Global investors are pretty sophisticated and have been well aware that it simply is not possible for a government in the final months of office to outline such plans and, in any case, not much could have been done until growth was re-established. But now the clock is ticking.
It is pure guesswork but my instinct is that the new government will have to produce a fiscal plan by about the middle of July. The reason for that is twofold. First, the Tories have promised an emergency Budget within 50 days of taking office – i.e. before the end of June. That sets a deadline, not just for them but in practice also for any alternative government, for example a Labour-Lib Dem coalition, although it could be stretched a little.
The second reason is that the world's financial markets will want to know the plans ahead of the summer holidays. Traditionally, financial crises used to happen in July, as dealers straightened out their books before heading off to the sun. But even if that phenomenon is not quite so evident recently it is hard to see markets waiting until the comprehensive spending review in, say, October, before needing some more specific guidance on the government's intention.
If something has to happen by July, what might that something be? Well, as far as the aggregate numbers are concerned, the broad outlines have already been put forward by all parties. This sets the minimum requirement that the bulk of the structural deficit has to be eliminated in the next four years, which is roughly the same as cutting the deficit in half over the same period. The Tory plan is a little more loaded towards earlier cuts but the differences are small. The core problem, as the Institute for Fiscal Studies pointed out yesterday, is that none of the three main parties has given any detail as to how it might achieve its overall deficit-cutting target.
In any case I suspect that the new government will have to go a little faster than these outline plans to be safe from the risk of a collapse of confidence. We have seen, most recently in the case of Greece, how the longer a deficit-reduction programme is delayed the more radical it has to be when it comes. Governments have to get ahead of market expectations.
To many people this will sound distasteful. Why should anonymous markets dictate what elected governments should do? Unfortunately, the plain truth is that the next government will have to borrow something upwards of £500 billions over the next five years and much of that will have to come from abroad. We don't have the savings in Britain to fund a deficit of this size. So the government has to satisfy savers worldwide that it will be able to pay back its debts or it won't get the money. Remember, the only country in the world that has a larger deficit, relative to the size of its economy, is Greece.
That leads to a further post-election issue: how does the new government ensure political support for its austerity programme? The electorate is quite unprepared for what is going to happen, for the plans already being drawn up by the Treasury are far more radical than anything that is being discussed in the campaign by any of the parties. There will accordingly be a powerful case for getting some form of external validation, showing that the plans are both necessary and credible. The Tories have proposed setting up an independent Office for Budget Responsibility to scrutinise its plans but I am not sure that will be enough, particularly were it not to have a clear majority. A coalition government of any sort – Lib-Lab or Lib-Con – would almost certainly require independent support.
If this is right, then there is a powerful case for calling in the International Monetary Fund, not necessarily for a loan, but for external scrutiny of, and support for, the government's plans. It would be more palatable politically for a Tory-led government to do this than a Labour-led one for the obvious reason that it was Labour who was forced to call in the IMF in 1976. But better to have it in early and retain control of events than have it in after some emergency, as is happening in Greece, and may well happen elsewhere among other heavily-borrowed economies in the coming months.
It is strange, isn't it? It is much easier to see the post-election economic policies than it is to see the political outcome of the election itself. We can see what is going to happen (even though the politicians won't tell us) but we can't see who is going to do it.
Finally, some good news for taxpayers
Something more cheering. The battered British taxpayer seems almost certain to make a profit from its involuntary investments in bank shares. I haven't worked out what happens to Northern Rock but we are already ahead on Royal Bank of Scotland and probably ahead on Lloyds Bank. Given a reasonable share market in the next two or three years, the profit could be of the order of £20-30 billions when the shares are finally sold.
The big message here for me is that governments can take risks that no private sector entity can do – and it is good, just sometimes, to see that rewarded.
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Papers on the three parties' fiscal plans are downloadable from the Institute for Fiscal Studies at http://www.ifs.org.uk/projects/323Reuse content