Nov. 1, 2010 -
PRLog -- The UK appears set for greater political volatility over the coming decade, owing to uncertainty about the long-term viability of the new coalition government and the likely backlash stemming from cuts to public spending. A further unknown at this time is the issue of constitutional reform, which is to be put to referendum on May 5 2011. Overall, the May 2010 election was a landmark event in that it denied both main parties a majority for the first time since February 1974 and ushered in the first coalition since 1945. Thus, Britain's political scene is in relatively uncharted waters. A lthough the May 2010 general election is now behind us, with the Conservative-
Liberal Democrat coalition looking stable in the shortto- medium term, political risk is going to remain a fixture of the UK political scene over the next 12 months. We see three core areas that will continue to exert downside pressure on our short-term political risk ratings: the stability of the coalition, the electoral reform agenda and elections to the devolved assemblies, which will be held on May 5 2011. While we view the UK government's radical fiscal consolidation programme positively, which will help anchor public finances on a more sustainable footing and keep sovereign bond investors onside, we stress that the magnitude of deficit reduction will pull down economic growth over the medium term. Given that ultra loose monetary policy and accommodative fiscal stimulus have been crucial to preventing a more precipitous economic decline during the recession, tightening the purse strings now will squeeze domestic demand hard. As a result, following the 1.0% real GDP growth forecast we have pencilled in for this year, we project just 2.3% and 2.6% growth for 2011 and 2012 respectively, from 2.9% and 3.4% previously (and compared with 3.0% in 2007). Chancellor George Osborne presented the emergency budget to the UK parliament on June 22, outlining how the government will cut the largest fiscal deficit in peacetime history. The occasion marked a number of firsts (and near-firsts)
in British politics: the first time that a government has used external economic and fiscal projections from the recently inaugurated interim Office for Budget Responsibility;
the first time a coalition government has presented a budget since Winston Churchill's war cabinet; and the first time a chancellor under the age of 40 has presented a budget since Lord Randolph Churchill took office in 1886. Coincidently, this also marks the last time that the original red budget box (first patronised by William Ewart Gladstone in the 1860s) will be used before being consigned to the national archives.
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