How the election will impact on your finances

May 5th, 2010

So, the election is very nearly upon us and whoever wins there are going to be important, and sometimes painful, effects felt by all of us.

The simple fact is that the Exchequer is in an abysmal state and, while most of the population seem unaware of it, the markets are not.

Many brokers and dealers in the City are going to be working throughout election night and this means a decisive result for the Conservatives will be stabilising but a hung parliament or, god forbid, a Labour victory will have catastrophic results before most of us have even finished our cornflakes.

Put simply, the value of the Pound would collapse and a huge rise in the cost of borrowing would immediately follow if there is no firm hand on government finances.

Financial analysts are especially wary of a hung parliament or a coalition, no matter its political make up, because of the uncertainty this would bring with it.

Over the past few days, as a Conservative victory has seemed more likely, the Pound has started to rise, with dealers betting it will go higher still. This will be intensified for those hoping to holiday in Europe this summer since the Greek problem means the Euro is falling.

However, the Pound’s rise will quickly reverse on Friday morning if the expected Tory victory doesn’t emerge.

The worst possible scenario for many of us is that the Lib Dem finance spokesman, Vince Cable, ends up as Chancellor in a coalition government. His avowed socialist commitment to redistribution has wide reaching ramifications, especially for those of us saving for retirement.

If he succeeds in his goal of abolishing higher rate tax relief on pension contributions he will strike at the heart of personal fiscal responsibility and remove one of the best incentives for people to save towards their retirement. And, considering the lessons of the past three years, that would be a bizarre, bordering on idiotic, thing to do.

Of course, none of the main parties have actually told us in detail what their plans are for cutting the deficit and, eventually, bringing down the national debt. A VAT rise, which economists describe as regressive because of its harsher effects on those with lower incomes, has not been ruled out by anyone, although the Conservatives have signalled their distaste at the idea.

Of course, there is no way to be certain about how the markets will react to whatever result emerges on Friday morning, but on some things we can be certain. The markets will react against uncertainty and will favour a firm hand being brought to bear on the perilous public finances. This is something to remember when you enter the polling booth on Thursday.

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