Britain’s two-party system is being eroded by an unprecedented surge of support for smaller parties. This Bloomberg Brief report examines the implications of the most uncertain general election in a generation.

1. Wednesday
April 15, 2015
www.bloombergbriefs.com

2. April 15, 2015 Bloomberg Brief U.K. Election Special 2
QUICKTAKE ROBERT HUTTON, BLOOMBERG NEWS
U.K., Bastion of Two-Party System, Shatters Into Many
The nation that gave the world parliamentary democracy is poised to confront the
system’s downside. The elections on 7 May are expected to give unprecedented support
to parties focused on targeted causes — fighting immigration, protecting the environment
and winning independence for Scotland. Giving voice to disgruntled voters promises to
expand political discourse. It also threatens to produce an unruly parliament that
hampers decision making in the world’s sixth-biggest economy.
Opinion polls predict no decisive winner, which would force the two main parties to
cajole as many as seven smaller groups to prop up a minority government or an untidy
coalition. Prime Minister David Cameron’s Conservatives and the main opposition
Labour Party are neck-and-neck at support levels of about 33 percent to 35 percent.
More than a sixth of the vote will probably be split between the Greens, who promise to
end welfare cuts, and the U.K. Independence Party, whose populist leader, Nigel
Farage, has thrilled economically marginalised parts of England by pushing for Britain to
leave the European Union and stem the flow of immigrants. The Scottish National Party
is poised to win the third-biggest block of seats and emerge as a key power broker. Its
membership took off after the defeat of the September independence referendum.
Spooked by defections, the main parties are focusing on core supporters, which
restricts their ability to win new voters. Labour plans a “mansion tax” on the rich and is
ahead in some polls, though voters are having a hard time seeing its leader, Ed
Miliband, as a potential prime minister. The Conservatives promise to hold a referendum
on leaving the EU if the party wins the election.
The U.K.’s constituency-by-constituency winner-takes-all voting system makes it
difficult for smaller parties to gain many seats in the 650-member House of Commons,
though they can still upset the results for the big parties. The upstarts say they don’t
want to join other parties to form a government, but instead plan to sell their support on
an issue-by-issue basis. That way they can avoid the fate of the Liberal Democrats,
whose backing collapsed when they joined the Tories after the last election to form
Britain’s first peacetime coalition government since 1945.
Many political analysts warn that the U.K. risks ending up with a government with no
clear mandate to rule, struggling to cobble together deals to get even the most minor
issues through Parliament. That could make it difficult to pass unpopular measures, like
spending cuts. Cameron became the first prime minister in more than 150 years to lose
a vote on military action when Parliament rejected a plan to bomb Syria in 2013. The
election could end up destabilising a permanent member of the United Nations Security
Council, a nuclear power and a key advocate of tough sanctions against Russia over
Ukraine.
CONTENTS
ELECTION GUIDE
Seven reasons this parliamentary
election challenges the rule book.
PAGE 3
THE POLLS
Breaking down the arithmetic shows
how uniquely close this election is.
PAGE 4
SEAT MAPPING
Assigning vote shares to seats shows
no party near the necessary 326.
PAGE 5
SCOTLAND
The SNP is becoming the
third-biggest force in U.K. politics.
PAGE 6
MINORITY REPORT
Support for UKIP and the Greens is
unlikely to translate into many seats.
PAGE 7
FISCAL GAP
The two biggest parties are £100
billion apart in planned net borrowing.
PAGE 8
TWO SCENARIOS
A Labour government is most likely,
while the Tories can hope for a surge.
PAGE 9
ECONOMIC IMPACT
Fiscal credibility matters more for U.K.
asset prices than the speed of cuts.
PAGE 10
THE ODDS
Punters expect the Conservatives to
take more seats but Labour to govern.
PAGE 11
MARKETS
Sterling, gilts and equities show how
unsettling domestic politics can be.
PAGE 12
SLOGANEERING
The Tories appear to be winning the
battle of sound-bites.
PAGE 12
Britain's New Multiparty Reality

3. April 15, 2015 Bloomberg Brief U.K. Election Special 3
ELECTION GUIDE ROBERT HUTTON, BLOOMBERG NEWS
Welcome to the Election That Challenges the Rule Book
While the result may be up in the air,
there are some smart things to know
about the way things will develop
between now and 7 May.
Polls Aren’t an Infallible Guide
Opinion polls give a prediction of the vote
each party will get. The difficulty comes in
translating those percentages into seats
in Parliament. The U.K. elects 650
members of the House of Commons, with
each seat going to the candidate with the
most votes. In 2010, the Conservatives
got 36 percent of the vote and 47 percent
of seats. By contrast, Labour under Tony
Blair took 35 percent of the vote in 2005
and garnered 55 percent of the seats.
According to Anthony Wells of YouGov,
even talk of error margins gives a false
sense of precision. “All we know is that
polls aren’t precise,” he says. He quotes
what statisticians call Twyman’s Law: “If a
statistic looks interesting or unusual, it is
probably wrong.”
The Biggest Party Doesn’t Get First
AfterShot at Forming a Government:
the inconclusive election of February
1974, Conservative Prime Minister
Edward Heath, with fewer seats than
Labour, stuck it out in his Downing Street
office until the start of the following week
in a bid to form a coalition. In 2010, talks
between the different parties carried on in
parallel. There are no rules about how
parties should seek a coalition
agreement. And there are no time limits
for negotiations, except the next general
election in 2020. There isn’t even a rule
about when one prime minister should
resign to allow another to take over.
Just Because He’s Lost, the Prime
Minister Doesn’t Have to Resign:
In fact, he isn’t allowed to step down until
a successor is in place. “There’s not a
formal mechanism,” says Philip Norton,
professor of politics at Hull University. “He
really goes at the point where it becomes
clear that the other parties’ negotiations
have reached a stage where they have a
majority.” The model is 2010, when
Labour’s Gordon Brown stayed in office
for five days after losing the election,
while the Conservatives and Liberal
Democrats hammered out a deal — and
Brown clung to the possibility that the Lib
Dems might swing back Labour’s way.
It’s Not That Straightforward to Have a
The inconclusiveSecond Election:
February 1974 election was followed by
another vote in October, in which Harold
Wilson’s minority Labour government won
a small majority. This time around, a
second election may be harder to trigger
thanks to the Fixed-Term Parliaments
Act, which requires the support of
two-thirds of MPs for an early election. A
slightly lower hurdle is for the government
to lose a vote of no confidence. But if that
happens, opposition parties get 14 days
to try to form a government before an
election is called. So a minority
government needs the opposition’s
consent before it can call an election, and
any time the governing party thinks is
good for an election is likely to be bad for
the other side.
Most Votes Doesn’t Mean Most Seats:
The voting system has tended to favour
Labour in recent elections. That is partly
explained by electoral boundaries, set by
an independent commission, moving
more slowly than people. Seats where
Labour does well, in inner cities and
deprived areas, often have smaller
populations. Labour has historically been
better at deploying its resources, winning
many seats by narrow margins rather
than piling up votes in seats.
Smaller Parties Will Struggle to Win
UKIP is averaging 13 percent inSeats:
the polls, but they’ll be disadvantaged by
the winner-takes-all voting system. The
gap between vote share and seats gets
starker the fewer votes you receive
because your support is spread out into
lots of losing piles. In 2010, the Liberal
Democrats won 23 percent of the vote
and just 9 percent of the seats. That’s
why few pollsters think UKIP’s current poll
rating will translate into more than six
seats. There is, though, a tipping point at
which the electoral system suddenly
helps smaller parties to become larger
parties. The Scottish National Party may
have reached this level: In 2010 it won six
seats, and current projections have it
winning as many as 56.
About 5 MPs Won’t Take Their Seats:
Sinn Fein, the Irish republican party,
refuses to recognise the right of a
Parliament in London to rule Northern
Ireland, and so its elected members, five
at the moment, have never taken their
seats. This reduces the number of votes
needed to get a majority to 323 or so from
the official number of 326.
Source: Bloomberg/Jason Alden

4. April 15, 2015 Bloomberg Brief U.K. Election Special 4
POLLS JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Breaking Down the Arithmetic of a Uniquely Close Election
The rise of small parties in Britain
complicates the mapping of vote shares
to parliamentary seats in an electoral
system that differs substantially from that
of the U.S. Without a big swing before the
7 May election, a hung Parliament looks
unavoidable. Whichever of the two main
parties gains the most seats can probably
claim a democratic mandate — albeit a
weak one — to try to form a government.
With the Conservatives and Labour
whisker to whisker in the polls, it’s
impossible to be confident about which
one that’ll be.
There are five main polls in the U.K.
that survey on a monthly basis at a
minimum. The survey methods vary
between the telephone and Internet, and
efforts are made to adjust for the
demographic profile of respondents to
achieve a representative draw. Some
were more accurate than others in
predicting the 2010 election outcome,
though there is no particular reason for
that to be repeated this time — the
volatility of the polls just before the
election suggests their accuracy could
easily have been by chance. The
differences between the polls are
summarised in a table available at http://b
.it.ly/UKPolls
In the U.S., state-by-state polling is
extensive and the sample sizes are large.
It is that volume of data that facilitates the
sort of analysis Nate Silver of
FiveThirtyEight.com conducted that
correctly predicted the 2012 election
outcome in all 50 states. At 650, the
number of constituencies in the U.K. is 13
times the number of American states
even though the population is just one
fifth of the U.S. — it would simply be too
expensive to poll them all.
Instead, the British are left to puzzle
over the national aggregates and look to
the Ashcroft survey of marginal
constituencies as a guide to the
behaviour of swing voters. The scope for
prediction errors, and therefore
election-related market reactions, is
probably greater in the U.K. than it has
lately been in the U.S.
While the polls appear to be relatively
stable in a band of plus or minus two
percentage points, within it they are
volatile, thanks partly to relatively small
sample sizes. To gain a broader indicator
of sentiment, polls are typically weighted
together — often taking a simple average.
An alternative is to apply a statistical
technique known as Principal
Components Analysis that attempts to
extract a common underlying signal from
the polls. Applying that technique to the
U.K.’s five most comprehensive monthly
polls and benchmarking them to the mean
and standard deviation of the ComRes
poll (which was not biased one way or the
other in 2010) gives the results illustrated
in the chart. The technique may confer
only a small advantage over the simple
average with differences from it ranging
between plus or minus one percentage
point of the vote share.
This Bloomberg Intelligence analysis
puts Labour and the Conservatives
virtually tied in April. The Liberal
Democrats seem roughly to be treading
water against a backdrop of gently
waning support.
The Conservatives look to have made
up some ground over the past few
months, possibly reflecting the improving
economic outlook, which is important to
voters. Having been vulnerable to
Labour’s “cost of living crisis” narrative,
the Conservatives are benefiting from the
falling cost of oil lowering inflation and
lifting real wage growth — though the
latter remains very weak by historical
standards. Together with lower interest
rates, that has also provided a fillip to the
public finances. The final budget of the
current Parliament was published on 18
March and received generally positive
press coverage. Yet that seems not to
have translated into a meaningful boost to
the Conservatives or the Liberal
Democrats, based on the polls that
followed it.
The big change since the 2010 election
is the evaporation of Labour’s support in
Scotland. The independence movement
has energised the Scottish National Party,
which now looks likely to claim many of
Labour’s seats north of the border. The
appointment of a new leader for Scottish
Labour so far seems to have failed to
reverse that trend.
The challenges of coalition government
have not been kind to the Liberal
Democrats, and they can expect to shed
a large number of seats. A backtrack on a
pre-2010 election pledge to prevent
student tuition fees from rising left many
supporters feeling betrayed, and the tie-in
with the Conservatives remains toxic. The
rise of UKIP has also seen Nigel Farage’s
party claim a higher proportion of the
expected vote share from the two biggest
parties. While that won’t translate into
many seats, it will unevenly sap votes
from the traditional parties — possibly
tilting the balance between them in some
constituencies.
— With assistance from Niraj Shah of
Bloomberg Intelligence
Whisker to Whisker: Our Estimates of the Polls

5. April 15, 2015 Bloomberg Brief U.K. Election Special 5
SEAT COUNT JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Tight Polls Set U.K. on Course for Hung Parliament
With the election just weeks away, the
polls are giving few clues as to the
possible victor. Whoever gets the most
seats probably has the strongest mandate
to form a government — and that’s likely
to be a protracted process.
Polls in the U.K. are conducted at a
national level, so they estimate the vote
share only. Even if the polls were 100
percent correct (and they vary widely),
analysts would still have to map that vote
share to seats. That task has become
much more complicated with the
movement from what was roughly a
two-party system to one under which six
parties might reasonably be expected to
take a meaningful number of seats. That
development is prompting a wide range of
forecasts among pollsters making this
election uniquely uncertain.
Here's how a few of the main political
analysts expect vote shares to translate
into seats (see tables). The key thing to
take from it is that under each scenario
the election outcome is a hung Parliament
— no party would be anywhere near the
326 number of seats required to form a
majority government (or 323 excluding
Sinn Fein, which usually does not take its
seats).
The Bloomberg Intelligence estimates
of the vote shares can be mapped to the
seat count in a relatively mechanical way
by applying the average translation from
political analysts between votes and
seats. That would be consistent with a
very narrow lead for the Conservatives,
with 277 members of parliament,
compared with about 270 for Labour and
no more than 22 for the Liberal
Democrats — that result would probably
give the Conservatives a mandate, albeit
a weak one, to try and form a
government. It is worth remembering that
sampling error and scope for
seat-mapping error mean the gap
between the two main parties is nowhere
near big enough to be confident of that
outcome. Without a big swing in the polls,
uncertainty will remain elevated to the
very last.
— With assistance from Niraj Shah of
Bloomberg Intelligence
Analysts' Vote Share Predictions...
MAY2015.COM ELECTION FORECAST ELECTIONS ETC THE GUARDIAN
Conservatives 32.4 34.6 35.0 33.8
Labour 33.8 32.3 32.0 33.8
Lib Dems 8.9 13.4 10.0 7.9
UKIP 14.5 10.2 13.0 13.4
SNP 3.4
Green 4.5 3.7 5.1
Other 5.9 2.4 10.0 6.0
...And Seat Estimates
MAY2015.COM ELECTION FORECAST ELECTIONS ETC THE GUARDIAN
Conservatives 275 287 300 272
Labour 269 270 258 273
Lib Dems 26 27 20 28
UKIP 3 1 4
SNP 54 43 47 51
Green 1 1 1
Other 22 21 25 21
Source: May2015.com, The Guardian.
No Party Is Likely to Achieve an Outright Majority

6. April 15, 2015 Bloomberg Brief U.K. Election Special 6
SCOTLAND RODNEY JEFFERSON, BLOOMBERG NEWS
The Scottish Streets Where the Election Will Be Won or Lost
John Donnelly adjusts the hood
shielding him from the cold Glasgow rain
and walks up to another house.
One of a squad of six Scottish National
Party activists on an evening of
campaigning in the east end of the city,
he reports back to his colleagues:
“Ninety-three is SNP.” The finding is
logged on a soggy page on a clipboard.
While a few smiles brighten the damp
night, for Donnelly, 27, this is a serious
business. His mission is to overturn half a
century of Labour dominance in Scotland,
evict the party from its traditional
heartland and redraw the political map of
Britain at the general election.
“For me, this is work,” he said. “But I
wouldn’t be able to look myself in the
mirror if I didn’t do something.”
Six months after a referendum on
independence put politics back into pubs
and living rooms, the movement that
brought voters out in record numbers and
rattled financial markets has evolved into
a mass phenomenon sweeping Scotland.
Rather than retreating after Scots voted
to remain in the three-centuries-old union
with England, the nationalists have
harnessed that radical spirit and directed
it at the Parliament at Westminster. SNP
membership has quadrupled to 100,000,
or one in 43 Scottish voters, and polls
suggest the surge in support will translate
into votes, placing Scotland once more at
the heart of deciding the U.K.’s fate.
“It’s unprecedented, on a different
scale,” Nicola McEwen, associate director
of the Centre on Constitutional Change
at Edinburgh University, said. “The
referendum was never about a simple
‘yes’ or ‘no.’ I just didn’t foresee how the
extent to which the ‘yes’ alliance
mobilised behind the SNP.”
The party’s rise is reverberating beyond
Scotland’s borders because polls point to
the election producing no clear winner,
potentially handing the SNP a decisive
role in who governs the country which
they are committed to splitting up.
Much of the focus in England has been
on a disaffected electorate and the rise of
the Greens and UKIP. Yet the voting
means they will probably win nosystem
more than a handful of seats.
Polls show the SNP is ahead in at least
40 of Scotland’s 59 districts. It currently
has six MPs at Westminster. If the polls
are replicated on Election Day, the SNP
could become the third-biggest force in
the U.K., with Labour, which has
dominated Scottish politics for decades,
the biggest casualty.
“Scotland will decide who governs the
U.K.,” said Jim Murphy, leader of the
Scottish Labour Party. “That’s how high
the stakes are and it’s no use pretending
otherwise.” Murphy, 47, acknowledges
the scale of the challenge. “These
numbers are terrible for the Labour Party
and worse for Scotland,” he said.
While the nationwide trend is for
younger voters to shun politics, the SNP
is managing to resonate in a way that
echoes the “cool Britannia” phase in the
1990s of Labour Prime Minister Tony
Blair’s first term. The proportion of
under-30s in the SNP has doubled to 21
percent, among them campaigner
Donnelly, who joined the party the day
after voting “yes” in the referendum.
People across Scotland refer to a sea
change in the country’s politics since the
2010 election, when not one Scottish seat
at Westminster changed hands compared
with five years earlier. By the following
year, the SNP had won an unprecedented
majority in elections to the Scottish
Parliament in Edinburgh, paving the way
for the independence referendum.
Defeat for the “yes" campaign should
have been the end of the movement.
Instead, as the pound dropped in
response to a poll showing the "yes" side
ahead in the final days of the campaign,
Prime Minister David Cameron offered
Scotland new financial powers in an effort
to sway the vote in favour of the union.
That left an opening for the SNP to exploit
with the argument that voters needed to
return a block of SNP MPs to ensure
those powers were delivered.
Yet the legacy of the referendum runs
deeper for many.
"It totally changed my life," said Philippa
Whitford, a consultant breast-cancer
surgeon who is running for the SNP in
Central Ayrshire, a district of former
mining communities and more affluent
towns on the west coast that was once
the stomping ground of Scotland’s
national poet Robert Burns. It also used
to be safe Labour territory. No longer.
Whitford, 56, worked as a medic in
Gaza in the early 1990s, and parted
company with Labour over its support for
the war in Iraq. She joined the SNP in the
wake of the 2011 landslide and was
among the women candidates proposed
by the party after standing out during the
referendum campaign.
The dynamism the referendum
produced never petered out as people
started looking toward the next election,
Whitford said over tea at her home.
"After the vote, you could just feel
people coming out of their caves and
blinking in the sunlight,” she said.
The SNP's Fortunes at Westminster Look Set to Change

7. April 15, 2015 Bloomberg Brief U.K. Election Special 7
MINORITY REPORT ROBERT HUTTON AND THOMAS PENNY, BLOOMBERG NEWS
Surging UKIP and Greens Matter Less in Election Than They Think
Supporters of UKIP and the Green
Party left their pre-election conferences
confident they are on track to cause a
political earthquake on 7 May and decide
the course of the next government. They
are half right.
The advance of the two parties, from
opposite ends of the political spectrum,
changes the dynamic in about a fifth of
the 650 seats in the Parliament by
threatening to siphon off votes from the
two main parties, the Conservatives and
Labour. But as the ballots are counted,
the surge is unlikely to translate into more
than a handful of seats, leaving them on
the sidelines when it comes to in any
coalition negotiations.
“There’s an expectations management
problem,” said Matthew Goodwin,
co-author of , a studyRevolt on the Right
of the rise of UKIP. “Activists are
measuring the curtains for Downing
Street, but UKIP will do well to win six
seats.”
The vote promises to be the tightest
since the 1970s, with any number of
scenarios dictating who forms the next
government. The electoral system is
based on competing for individual seats,
meaning vote share nationwide counts for
nothing if candidates can’t win a majority.
Since 2010, when it won 3.1 percent of
the vote and no seats, UKIP has ridden a
tide of anger toward the main parties over
the economy, immigration and relations
with the European Union. It now polls in
third place, with about 13 percent.
With the Greens, they account for more
than 20 percent of the vote. The Greens
won just one seat in 2010 and, despite
competing in more than 500 in May, are
unlikely to win any more. The Scottish
National Party, by contrast, might take
less than 4 percent of the U.K. national
vote yet come away with as many as 50
seats, based on recent polling.
All three have rejected being part of a
formal coalition, and instead have talked
about selling their support in parliament
on a vote-by-vote basis. At his party’s
election launch on 12 February, UKIP
leader Nigel Farage spoke of
“campaigning” for policies rather than
promising to deliver them, a marked
contrast from some others in his party.
“I think what we can achieve 20 or 30
seats, and hold the balance of power,”
Sue Ransome, 63, from Boston, a market
town in Lincolnshire where many
immigrants from eastern Europe have
settled, said at the UKIP conference.
“That’s how we’ll make a difference.”
Nigel Jones, the party’s candidate for
Eastbourne, was a little less optimistic.
“I’m pretty certain that we will get 10 to 12
seats,” he said. “We can be one of the
brokers of power.”
There were similar voices at the
Green’s gathering in Liverpool. Caroline
Lucas, the party’s only MP, predicted an
alliance with the Scottish and Welsh
nationalists to drive an anti-austerity and
anti-nuclear agenda.
“We can support Labour when they do
the right thing, but block them when they
try to ape the Tories,” Lucas said in her
conference speech. “After this coming
election we can do far more whether we
have one Green MP or 10, we can be part
of a progressive force for good.”
Should UKIP end up winning six seats,
its influence is likely to matter only in very
tight votes. Farage has ruled out
supporting a Labour government, and he
won’t have much to offer to Conservative
leader David Cameron.
Two of those UKIP members would be
likely to be former Tories Douglas
Carswell and Mark Reckless, who both
defected last year. Cameron might point
out to Farage that even when they were
in the Conservatives, voting records show
they couldn’t be relied on to support the
party’s policies.
That doesn’t mean that UKIP and the
Greens aren’t important. They can upset
results in tight seats by taking votes that
other parties were counting on.
Goodwin, the author, estimates UKIP
threatens the Conservatives in about 70
seats and Labour in 60. And if UKIP
comes second in a large number of
Labour seats, the party may reconsider its
position on an EU referendum.
“The number of seats they can win is
quite minor, the number of seats that they
could complicate is quite large,” Andrew
Russell, professor of politics at
Manchester University, said. “You’ve then
got the chance to influence the agenda of
the other parties as well.”
At the Green conference, while some
activists were realistic about their party’s
prospects, others still said they believe
power is in their grasp.
“Everyone’s going to be in for a
surprise, we’re really going to put the
other parties to shame this time,” said
John Devine, 65, the Green candidate in
Amber Valley in the Midlands. “There are
so many people out there who are
starting to look seriously at our policies.”
Source: Bloomberg/Jason Alden
UKIP supporters at the party's pre-election conference in Margate

8. April 15, 2015 Bloomberg Brief U.K. Election Special 8
FISCAL GAP JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Parties Are Running About £100 Billion Apart
With a hung Parliament in prospect, no
political party is likely to have the luxury of
governing alone and fully implementing its
plans. Still, ahead of the post-election
negotiations, it is worth looking at what
each of the main parties will bring to the
bargaining table.
The Conservatives have the tightest
fiscal policy. The Labour Party seems to
have the flexibility to meet its policy
objectives and, at the same time, end
austerity (if defined as real-term spending
cuts), while the Liberal Democrats have
cut a path down the middle.
In any event, borrowing in the next
Parliament is likely to be higher than was
projected in the Conservative and Lib
Dem coalition’s March 2015 budget
statement. The spending cuts as currently
planned by the Conservatives are
significant, especially given how much
they have cut already. The two biggest
parties may be about £100 billion apart in
terms of borrowing plans by the end of
the next Parliament.
For a table of Bloomberg Intelligence's
interpretation of how each of the parties'
policies would affect public-sector net
borrowing, see .http://bit.ly/UKbudgets
Conservatives
The Conservatives in these calculations
are assumed to borrow a bit more over
the next few years as NHS spending
ramps up to an extra £8 billion in today's
money. That erodes the overall borrowing
surplus at the end of the next Parliament.
These plans suffer from a credibility
issue: very sharp spending cuts in
2016/17 and 2017/18, before reversal
later on. It doesn’t help that the
Conservatives haven’t said anything
about how those cuts would be achieved,
despite having access to the machinery of
government.
Labour
We assume that a Labour government
holds spending constant in real terms
beyond 2015/16 for the NHS but tops that
up with £2.5 billion extra a year, and also
that education spending is flat in real
terms and spending on international
development is constant as a share of
national income. It’s also assumed that
Labour would cut real departmental
spending in unprotected departments
every year until the current structural
deficit is eliminated — the party has
stated publicly that it would do so.
Compared with the policy path assumed
for the Conservatives, the Labour
scenario would see the Treasury issue
about £101 billion more in debt over the
next Parliament, leaving debt 4.6
percentage points higher as a ratio to
GDP by the end of it.
The figures here depend on Labour
cutting unprotected departmental
spending by 1 percent a year in real
terms after 2015/16. Deeper annual cuts
of 1.5 percent would see the structural
deficit eliminated a year earlier and
cumulative borrowing would be lower.
Liberal Democrats
The Lib Dems are assumed to follow
the policies laid out in the “yellow book”
delivered to Parliament after the official
coalition budget. Again, the extra
spending means more borrowing. In
cumulative terms, over the next
parliament, the Lib Dems would borrow
about £53 billion more than the coalition's
baseline, £29 billion more than the
Conservatives and about £72 billion less
than Labour.
Fiscal Outlook
There are very significant differences
between the main political parties’
economic and fiscal plans. The coalition’s
budget baseline policy is probably so tight
and concentrated on relatively few
government departments that the
economy would struggle to make the
required adjustments without disruption.
The Conservatives’ plans are the
tightest of the three main parties and
consequently deliver the fastest reduction
in the debt-to-GDP ratio. The policy mix
means the squeeze on departmental
spending should be achievable, but it
comes with risks, and the absence of
detail is a significant concern.
Labour’s plans are the least onerous,
with departmental spending flat in real
terms by the end of the next parliament.
That still represents a squeeze on service
delivery since the population is expanding
and aging. The price is more borrowing,
though debt would still fall as a share of
GDP over the next parliament.
The Lib Dems' policies would also see
more borrowing, cutting a path between
the Conservatives and Labour. That
leaves them in a good place to negotiate
as part of a new coalition government.
How the Parties' Debt-Reduction Plans Compare

9. April 15, 2015 Bloomberg Brief U.K. Election Special 9
SCENARIOS JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Two Main Scenarios of How the Election May Play Out
Absent a big swing at the ballot box,
whatever government emerges from the
political fog will depend on some degree
of cross-party cooperation — that fact
alone should protect the U.K. economy
from the worst outcomes.
The politics of this election are uniquely
complicated by the rise of the Scottish
National Party, which is likely to take a
significant number of Labour seats in
Scotland and prevent it gaining an overall
victory in the wider U.K.
For the purposes of assessing the
effects of different governments on the
economy there are a couple of main
scenarios worth considering.
Labour Minority Government
If the seat count comes in as page 5
illustrates, the formation of a minority
Labour government supported by the
Scottish National Party and possibly the
Lib Dems is the most likely outcome.
However, the route to it could be a bumpy
one. First up, the Conservatives would
probably have the most seats in
parliament and a mandate to try and form
a government. With just 277 seats, the
Tories would be miles short of a majority
and, even with Lib Dem and Democratic
Unionist Party support, would fall short of
one that is workable because the
opposition parties could carry a vote of no
confidence.
There might reasonably be questions
over whether Labour can justify forming a
government having taken fewer seats
than the Tories. But the fact is that the
mandate for a centre-left progressive
government would be strong. Labour,
SNP and Lib Dem policies (beyond
Scottish independence) are all in the
same ball park and together the parties
would take the most seats and account
for the highest share of the vote by a
decent margin.
With the SNP campaigning to split up
the U.K., it would not be acceptable for
the party to hold any ministerial positions
— an official coalition government has
already been ruled out by both parties.
Instead, the SNP would agree to support
Labour to prevent other parties bringing
down the government with confidence
votes and make sure it is able to get its
Budget statements through parliament —
this is known as a confidence and supply
arrangement. The Lib Dems could
probably be persuaded to do the same
but there is little reason for Labour to offer
any ministerial positions. Under this
scenario, the House of Commons would
look like the chart above.
Policywise, the SNP wants to end the
"austerity politics of the Westminster
establishment" and Labour could meet its
fiscal objectives without any real-term
reductions in overall government
spending — though some unprotected
departments would experience cuts. The
U.K.’s position in Europe would be safe,
since neither party wants a referendum
on EU membership. That the SNP could
demand another referendum on Scottish
independence as the cost for its support
further down the line would present a
significant challenge to the longevity of a
government of this form.
Conservative Minority Government
On present polling, the Conservatives
would not have anywhere near enough
seats to command a majority. However, a
significant prediction error or shift in the
polls to consistently above 36 percent of
the vote share could see the party win
300 seats. It would still need support from
other parties, potentially the Lib Dems
and the DUP.
It’s likely that the Tories and Lib Dems
would meet in the middle in terms of
policy — smaller departmental spending
cuts and slower deficit reduction, but still
tight fiscal policy overall.
On Europe, neither the Conservative
leadership nor the Lib Dems want to see
the U.K. leave the EU. It’s possible,
therefore, that Lib Dems could demand
abandonment on the referendum as the
price of its support. The risk is that
anti-EU sentiment continues to fester
among Tory backbenchers. Given the
slim margin of seats, they would have
more power. That is the single biggest
risk to Conservative party cohesion and
thus the longevity of a Tory minority
government.
Wild Cards
Other scenarios include a significant
swing in the polls to produce a majority
Conservative or (less likely) Labour
government — or a 'nobody wins'
scenario, even after negotiations, that
would trigger new elections.
How a Labour Minority Government Might Look

10. April 15, 2015 Bloomberg Brief U.K. Election Special 10
ECONOMIC IMPACT JAMIE MURRAY, BLOOMBERG INTELLIGENCE ECONOMIST
Fiscal Credibility Is the Biggest Risk for U.K. Parties
The fiscal plans of all three major
parties are consistent with medium-term
deficit reduction and falling debt relative
to the incomes that service it. It’s the
credibility of those plans that is crucial in
determining the premium paid on British
debt, and the speed of fiscal consolidation
is probably far less important.
The 2010 general election is a good
example. Again, it was a close one (a
hung parliament was in prospect) and the
parties were thought to be some distance
apart on the scale of fiscal consolidation
plans. If the party in power mattered
much, movements in the cost of British
debt over that period could have been
expected. Indeed, British 10-year
borrowing costs fell from about 4.1
percent at the beginning of 2010 (when
the Labour Party might have been
expected to win) to less than 3 percent by
August of the same year (some time after
the Conservative-led coalition’s
emergency budget).
Some might be tempted to attribute the
fall in borrowing costs to the changing
political landscape, but that would be
wrong. Rather than a fall in the gilt risk
premium, the decline in 10-year
borrowing costs can be explained almost
entirely by lower expectations for policy
rates, as the chart illustrates. What’s
more, the same movement in rates was
experienced in the U.S., indicating a
substantial global influence. All else
equal, politics could have had an effect of
about 0.2 percentage point on 10-year gilt
yields, but that’s probably an
overstatement of the election’s impact.
Fiscal Policy Effects
While the political party that comes to
power is unlikely to have a significant
direct influence on government borrowing
costs, its fiscal policy stance may have an
indirect influence via monetary policy. The
size of the fiscal consolidation has a
direct read across to the degree of
monetary activism required to stabilise
demand in the U.K. economy. Indeed,
one of the reasons monetary policy is
currently so loose in the U.K. is that a
sizable consolidation is in prospect for the
next Parliament.
The difference between the fiscal
policies of a Labour minority government
— assuming it gives no ground to the
Scottish National Party on scaling back
austerity — and a Conservative minority
government could be significant. Because
fiscal consolidation leeches demand from
the economy, there would be more of
offset needed from monetary policy to
keep the economy on a stable growth
path under the Conservatives. That
means a lower path for policy rates and
sterling.
The EU Referendum
Above all it is crucial to recognise that
the probability of a U.K. exit from the
European Union is extremely low — this
is what stands between the general
election and significant U.K.-centric
market volatility.
The reasons for that are several:
First, whoever forms a government is
very likely to depend upon the support of
at least one party that doesn’t want to
hold a referendum and may demand its
abandonment as a price for support. It
would only be if the Conservatives won a
majority that a referendum would be
assured — as mentioned earlier, the odds
of that are slim.
Second, even if a referendum is
pledged, whether senior Conservative
leadership campaigns to stay in the union
depends on what concessions can be
negotiated with other European
governments — since neither Prime
Minister David Cameron nor Chancellor of
the Exchequer George Osborne wants to
leave, the bar would be low.
Third, even if a referendum is held and
the Conservatives campaign to leave,
public support for staying has rarely been
higher — 45 percent want to stay, with
just 35 percent voting to leave. Since it
would take time for opinion to shift in that
direction, a more meaningful
Europe-related market reaction might
more realistically be expected to come a
long while after the election itself.
Decline in Yields in 2010 Largely Due to Lower Global Rates

11. April 15, 2015 Bloomberg Brief U.K. Election Special 11
THE ODDS PAUL SMITH, BLOOMBERG BRIEF EDITOR
Punters Give Overall Majority Less Than 15% Chance
The Conservatives will win the most seats but fall short of an absolute majority, leaving Labour to take power as a minority government.
That's the emergent view of gamblers on Betfair Group's exchange, which pits punters against one another.
The Steady Ascent to a Hung Parliament Tories Predicted to Win Most Seats, But...
The chances of a majority are evaporating. The probability of a
hung Parliament has risen to 87 percent, according to Betfair. A
Tory majority is priced at 11.5 percent and the likelihood of an
outright Labour win is just 2 percent.
The Tories are comfortably winning the race for most seats,
according to Betfair punters. The Conservative Party has a 64
percent chance of outnumbering its rivals; Labour is languishing
on 36 percent.
…Labour Most Likely to Form a Minority Government
Here's where it gets really interesting. Despite the remote likelihood of Labour winning an outright majority (remember, just 2 percent), a
Labour minority is the most likely government at 33 percent, according to the odds. This chimes with recent polls and Bloomberg
Intelligence . A Tory minority is the second-most probable outcome at 26 percent, followed by a Conservative majority at 11.8analysis
percent. The chances of a repeat of the Conservative-Liberal Democrat coalition? Just 8.7 percent.
(Note: The probabilities are calculated as the reciprocal of mid-prices between back and lay odds. The charts show odds to 8 April. The
chances cited in the captions are based on Betfair mid-prices as of 14 April).

12. April 15, 2015 Bloomberg Brief U.K. Election Special 12
OPINION
Election Fracture Starting to Spook Investors
, BLOOMBERG VIEW COLUMNIST BY MARK GILBERT
The most exciting/divisive/unpredictable (take your pick)
election in decades is finally starting to ping the risk radar of the
global investment community. The prospect of a hung
Parliament, with neither Labour nor the Conservatives winning
enough seats to form a government, and both reluctant to co-opt
a smaller party into a full coalition, is making investors wary of
owning U.K. assets.
The distress is most evident in the currency market, where the
pound has fallen to its weakest in five years against the dollar, as
the first chart illustrates.
The government bond market is also showing signs of stress.
The gap between what investors charge the U.K. government to
borrow for a decade versus how much they charge Germany has
been widening in recent weeks. Gilt yields have edged higher
while German bund yields continue their descent toward zero.
Some of that move is due to what's happening in the euro
zone, where the European Central Bank is making good on its
pledge to buy 60 billion euros ($64 billion) of government debt
each month, driving yields lower. But foreign investors dumped a
net £14 billion of U.K. government debt in January and February,
suggesting overseas distaste for gilts is also playing its part in
widening the borrowing gap against Germany.
The equity market isn't unscathed by political concerns. The
benchmark European stock market index, the Stoxx Europe 600,
has outpaced the U.K.'s FTSE 350 index by 2.46 percent since
the gilt market started to take fright on 25 March. On an
annualized basis, that means U.K. stocks are delivering less than
a third of the return investors have achieved in European
equities.
The market moves provide a timely reminder that domestic
politics can be just as unsettling for financial markets as
geopolitical ructions, albeit on a more parochial basis.
Conservatives Beat Labour in Battle of the Slogans
BY PAUL SMITH, BLOOMBERG BRIEF EDITOR
In one of his more lucid moments, frontman JimDoors
Morrison said, "whoever controls the media, controls the mind."
Apply this rockstar aphorism to the election and David Cameron's
Conservative Party should comfortably beat Ed Miliband's Labour
Party on 7 May.
In the battle of the slogans the Tories' "long-term economic
plan" appears in almost five times as many news articles in
March than Labour's choice shibboleth, "cost of living crisis."
(The story counts are derived from Bloomberg's News Trends
function that searches through articles from more than 100
different news sources.)
A simplistic analysis, perhaps, but this peddling of sound-bites
by the Fourth Estate may support the assertion of Simon
Wren-Lewis that the U.K. media has a distorted and biased view
of economic policy. Wren-Lewis, an economics professor at
Oxford University, has dubbed this . He contendsmediamacro
that the media are more obsessed with the budget deficit than
holding the governments' policy of austerity to account.
Still, while the Conservatives seem likely to win more seats
than Labour, they are unlikely to break on through to the other
side of the 326-seat threshold required for an absolute majority.
Pound Suffers Election Fever
Political Risk Is Rising
Riders on the Media Storm

13. April 15, 2015 Bloomberg Brief U.K. Election Special 13
CONTACTS
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