Suddenly, the prospect of a Conservative election victory is far from certain. Government ministers and strategists have a bounce in their step not seen since Gordon Brown’s very first months as prime minister.
Certainly, the Liberal Democrats will play a pivotal role should a hung parliament come to pass. Already, they have sought to calm markets jittery at the idea the upcoming election won’t deliver a clear mandate by proposing a £10bn repayment of national debt, financed from £15bn of spending cuts to be outlined this month.
Fears that a hung parliament might cause a run on sterling because of market uncertainty, however, should be taken lightly. It’s worth remembering that markets in countries such as Germany and Italy have long become used to coalition government.
That said, policy stability – admittedly easier said than done in an age of austerity – would be advantageous. And maintaining a climate in which investors can have confidence will be crucial. Here, politicians and senior civil servants alike must work together to project a united front. Discord at the top is hardly likely to counter fears that a hung parliament might lead to market uncertainty about the ability of a minority administration to reduce Britain's record £178bn deficit.
Greater certainty about future policy and regulatory frameworks affecting different sectors of the economy should therefore be a priority of whoever next occupies 10 Downing Street. Take the UK’s energy system, for example.
In the next three years, energy companies must commit to £35bn-£50bn of investment in power stations, wind farms and gas storage, to meet government objectives for cutting carbon dioxide emissions, while guaranteeing reliable electricity supplies. Yet market uncertainty could cause an investment hiatus that would lead to future strains on the electricity system.
Managing significant changes to the energy market presents a paradox between speed and the need to build consensus. A similar paradox is presented by the profitability of power companies. They need acceptable levels of profit to commit capital that could be deployed elsewhere internationally, but too much profit risks intervention to increase competition and tighten regulation.
In the event of a hung parliament and a minority government, it will be important for the main parties to act on their broad consensus about energy policy. Endlessly debating these issues will take us nowhere fast.
For energy, much like with other sectors of the economy, time is of the essence. If political and regulatory inertia is the real result of the upcoming election, then winners will be few and far between.
James Close is a partner in Ernst & Young’s Government Services practice
