Following the Conservatives’ surprise majority election win, the FTSE 100 gained around 150 points within 24 hours. That’s a clear indication that, on the whole, investors were happy that we have the same Prime Minister and the party in government that was largely responsible for much of the economic success of the last few years, with the UK economy being one of the fastest growing in the developed world.
EU Referendum
Looking ahead, though, the future of the UK economy and the personal finances of its inhabitants may not be so straightforward. For starters, the EU referendum is looming on the horizon and could create a black cloud over the UK economy until the result is known. In fact, it is likely to cause considerable uncertainty among businesses and investors, with businesses likely to delay capital expenditure and investment in the UK until they know what the future of the country will be, with investors likely to include a discount to the stock market’s intrinsic valuation as a result of a possible fallout from leaving the EU.
Of course, it must be stated that whether leaving or staying in the EU is better for the UK economy is highly subjective but, for businesses and investors, consistency and a lack of change are nearly always preferable to the risk of a known unknown.
Political Troubles
While the Conservatives have a majority, it is a very slim one. This could make it difficult for them to govern and, in reality, after the honeymoon period ends they are likely to require opposition party support to get some of their bills through parliament. The EU referendum is also likely to cause problems with Eurosceptic backbenchers who could realistically go against the party line and seek a ‘Brexit’ even if Tory high command is satisfied with the concessions that may or may not come from the EU. As ever, a weak government can often cause economic performance to be somewhat disappointing, as confidence is hit in the short run.
Cuts And Taxes
Whatever the result of the election, spending cuts were a certainty. With the Conservatives in majority government it means that they are likely to be deeper, faster and more painful than under a Labour government or a coalition. This could directly impact on the personal finances of a number of people, while the chances of increased taxation remain slim under a Tory government. In fact, it is likely that the thresholds for paying tax will rise at a brisk pace, with the Conservatives promising a £50k higher tax rate threshold, as well as £1k of tax free savings per year and an extension of the demand-side housing policies to try and make houses more affordable – especially for first time buyers.
Looking Ahead
Clearly, the UK economy is performing well, with record numbers of people in employment, low inflation, strong GDP growth, wage rises and a stock market that is near to record highs. In the long run, then, more of the same from the government (i.e. policies from the last five years) is likely to be a good thing for your personal finances.
However, in the short run, there is likely to be a considerable amount of uncertainty, with a referendum, significant political risk and spending cuts having the potential to put a brake on asset prices in the meantime. As a result, the next year could be a great time to buy assets such as shares, with there being the potential for significant gains in the long run.