What Fitch Ratings Has to Say About the UK Election

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The U.K. general election results are in and it has a few people surprised. The Conservative party was hoping to gain some ground in Parliament but in fact lost some seats. Ultimately, what we’re looking at is a “hung Parliament,” which means that neither party has a clear majority. As a result, Fitch Ratings commented on the uncertainty that is arising from this situation.

The ratings agency pointed out that this election will have implications for Brexit and potentially fiscal policy. The political, economic and institutional uncertainty stemming from the June 2016 Brexit referendum and the upcoming U.K.-EU negotiations is reflected in the firm’s Negative Outlook on the nation’s AA sovereign rating.

Prime Minister Theresa May will seek to form a government with support from Northern Ireland’s Democratic Unionist Party (DUP), after her governing Conservative Party fell short of a parliamentary majority. While this would avoid a prolonged period of coalition talks, the terms of the agreement are unclear and another election in the near term is possible.

The election result highlights how no single Brexit negotiating position appears to command majority popular or parliamentary support. The Labour Party says it accepts the referendum result, and it also pledged to set out “fresh negotiating priorities that have a strong emphasis on retaining the benefits of the Single Market and the Customs Union” and rejected a “no deal” outcome.

There is also the potential that this result may also delay or disrupt Brexit talks, which are due to start this month.

According to Fitch:

The election increases the possibility of looser fiscal policy. The Conservative manifesto aims to balance the UK budget by the middle of the next decade, later than previously planned, although detailed tax and spending proposals were broadly consistent with March’s budget. But Labour’s stronger-than-expected performance after campaigning for higher public spending and investment funded by higher corporation tax and other tax increases suggests that “austerity fatigue” is a meaningful factor in UK politics. Meanwhile a minority or Conservative-led coalition government may have to compromise on the pace of fiscal consolidation or specific policy measures to maintain parliamentary support (the reversal of proposals to increase social contributions for the self-employed in March’s budget highlighted a degree of inflexibility in fiscal policy making).