Brave New World

Grown-up politics reaches the UK- support for Sterling? 06/10/2009

One of the more depressing themes to have emerged in recent months has been the inability of the main political parties to address the growing fiscal problem in the UK. Despite numerous warnings by credit rating agencies, concerns expressed by the IMF and growing murmurs among the investment community about the need for a new era of fiscal austerity, neither of the two political parties until recently had spelt out precisely what they would do. Indeed, Gordon Brown demonstrated new lows in his ability to be straight with the British people, insisting until very recently that Labour would continue to increase spending (“investing”) in real terms over the next few years, in contrast to the Conservatives’ ideologically motivated cuts. This attempt to put clear blue water between himself and his opponents looked ham-fisted and disingeneous. The lack of credibility in Brown’s statements added to his already diminishing authority in government and the country. It also inhibited serious debate between the two parties about the tough choices the government will have to make after the election.

However, as Brown’s position has been undermined by Treasury figures, briefing by cabinet members and the entire investment community, grown-up politics has finally prevailed, with the Prime Minister finally admitting that in the unlikely event of his party winning the next election he would in fact make cuts. This has now allowed the Chancellor to outline Labour policies, including freezing public sector pay. The  Conservatives, meanwhile, have begun to announce their own plans. A more mature and honest debate was long overdue, particularly with the British people. A recent Ipsos MORI poll revealed that only 24% think spending on public services needs to be cut to improve the public finances. One of the many factors weighing on Sterling has been the political inactivity over addressing the fiscal deficit. The latest developments are welcome and provide investors one less reason to sell sterling. All else being equal, the new political environment should be mildly positive.