At the moment, sterling is being buffeted by the release of opinion polls which provide an indication of what might happen in the General Election. Elections often bring periods of volatility because of the uncertainty; this is currently compounded by the continuing lack of clarity over Brexit. Looking ahead to 13th December and beyond, the party manifestos provide an indication of what may lie in store for sterling next year. From changes to taxation to promises of greater public spending, the economy is set to change regardless of who wins the election and there may be a period of adjustment as the pound responds to the new economic landscape.
The Conservative manifesto provides a clear path to Brexit
The Conservatives have pledged to “get Brexit done” and the advantage for sterling is that the proposed deal is already known. If the incumbents win a majority, they will be on track to pass the required legislation and press ahead with the UK’s departure from the EU by the end of January 2020. In a reversal of previous austerity policies, there are significant spending promises, largely funded by simplifying tax regimes to clamp down on tax avoidance and implementing a new Digital Services tax in a move that the Conservatives estimate will deliver an additional £35bn. All of this reads as good news for business and by extension for the pound. The long term future of sterling may depend on the outcome of ongoing trade negotiations once Brexit is delivered, but a Conservative majority will at least give the pound a reprieve from the ongoing uncertainty since the EU Referendum result in 2016.
The Labour Party plan to rip up current plans and start again
Labour’s solution to the Brexit problem is to negotiate a new deal within the first three months in Government, and provide a legally-binding referendum on that deal within six months. This will leave the pound in Brexit limbo for the first six months of the year, and at a time when there may be sweeping changes to business as Labour implement gradual increases in Corporation Tax up to 21% over a series of years and an increase in the minimum wage, together with a raft of new measures aimed at improving the diversity in FTSE350 companies and increasing environmental protections and responsibilities. If businesses are struggling under the rapid change, particularly with a backdrop of uncertainty, the pound may see further volatility, at the very least until the dust settles on the proposed changes.
Small parties make big promises
Given the uncertainty of the election outcome, it’s worth paying attention to the manifestos of the smaller parties. The Liberal Democrats promise to end Brexit at a stroke, which may disperse the Brexit cloud hanging over the pound, but it would bring with it further uncertainty if a surprise win meant a largely untested party in Number 10. It’s more likely that the significance of the Liberal Democrats, like the Green Party and the SNP, will come into play if the electorate delivers a hung Parliament and a coalition government is formed. All three have strong ‘Remain’ strands in their manifestos and are pushing for electoral reform including proportional representation and votes for 16 and 17 year olds. In addition, the SNP are pushing hard for a second referendum on independence and the Green Party are calling for significant investment to combat climate change. All of this spells more volatility for the pound as new uncertainties emerge for the currency exchange markets.