Channel 4's FactCheck Blog - Will hung parliament lead to IMF bailout?

Will hung parliament lead to IMF bailout?

Author: FactCheck|Posted: 8:40 pm on 21/04/10

Category: Conservatives, Economy, Election 2010, George Osborne | Tags: bailout/ IMF/ Ken Clarke

The claim
“If the British don’t decide to put in a government with a working majority and the markets think that we can’t tackle our debt and deficit problems, then the IMF will have to do it for us. That will be the view outside.”
Ken Clarke, Shadow Business Secretary, 21 April 2010

The background
In a press conference earlier today Ken Clarke warned of dire consequences in the financial markets if the election resulted in a hung parliament.

According to Ken, the market reaction could force the UK to go cap-in-hand to the International Monetary Fund for a loan, just like Greece is having to do now.

Pressed by Channel 4 News, the shadow chancellor, George Osborne, backed Mr Clarke’s comments, saying that the last time the IMF came in was when “the governing party did not have a workable majority in parliament” in the late 1970s.

Mr Osborne added that people needed to be aware of the consequences of a hung parliament: “I don’t think people should underestimate the economic consequences of political instability in their country when at a time when we are running one of the largest budget deficit in the developed world, when people have questioned our credit rating and when you can see there is a very serious problem with unemployment and business confidence.”

So should British voters be worried of the economic consequences of a hung parliament, or is it just political scare-tactics?

The analysis
Britain is unusual that in it rarely has a hung parliament – the last time one was elected was in 1974. But countries like Spain, Germany and Holland regularly return a minority government.

In fact, Professor Luis Garicano of the department of management at the London School of Economics, says that the claim that a hung parliament could spook the markets to the extent that an IMF loan is needed is an “absurd proposition”.

“I’m very surprised that the press are so insistent in this point,” says Professor Garicano. “It’s not going to make any difference from the outside. I think every foreign economist is flabbergasted by the suggestion.”

Professor Garicano says the real concern of the markets would be the progress of the new government in reducing the deficit and adds that the UK is fortunate that the three main parties are well regarded internationally and similarly-minded on economic issues.

Professor Garicano’s assessment is supported by another academic, Professor Philip Booth of the Institute of Economic Affairs. He says the three main parties’ approach to tackling the UK’s debt and deficit are “more or less the same”.

Professor Booth echoes Professor Garicano that the main issue influencing whether or not the IMF will be called in will be the new government progress in tackling the deficit. But he adds this is a medium term problem that won’t be affected by short-term political instability.

Professor Booth also casts doubt on the influence of political instability on the problems that led to the Callaghan government’s approach to the IMF in 1976. He says it actually was the result of years of financial mismanagement by both Labour and Conservative governments.

The verdict
While markets don’t like uncertainty, our economists agree that having three main parties with similar economic outlooks provides some degree of stability.

So despite the Conservatives’ insinuations, a hung parliament would not lead directly to an IMF bail out. In the words of Professor Booth, this particular Conservative claim is a “red herring”.

But – as all of this is opinion not fact – FactCheck will wait to see what happens post May 6th before declaring fact or fiction.

via blogs.channel4.com

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