With the General Election just two months away, we could have a new Prime Minister at 10 Downing Street in a very short period of time. Clearly, this would be significant news for the country, but may also have a substantial impact on your personal finances.
An Uncertain Period
For starters, having a new Prime Minister is likely to wipe £billions off the value of UK pensions and investments. That’s because investors do not like change or uncertainty, and a new Prime Minister with new ideas brings both. As a result, the FTSE 100 is likely to fall in a relatively short space of time and, while there seems to be a discount already priced in, the uncertainty over the tax system, the UK’s finances and the future trajectory of the UK economy are likely to make it sink much lower. As such, your pension pot and stock market investments could fall and reduce your net worth.
Taxes
Of course, a key battleground for the upcoming election is taxation, with the Conservatives promising to reduce taxes for the majority of working people and Labour apparently seeking to shift the burden of taxation onto higher earners. Clearly, the effect of a Labour-led government will depend upon your income level but, as a generalisation, it seems likely that you will pay higher taxes under Labour than under the Conservatives.
That’s because, while both parties are aiming to reduce the UK’s deficit, Labour is set to achieve this through higher taxes, with the Conservatives planning on cutting spending to a greater extent than Labour. Both may achieve the same end result of reducing the budget deficit to zero, but Labour’s plan could mean that you have less money in your pocket in the meantime.
Spending Plans
On the topic of spending plans, Labour is planning on reducing the deficit at a slower pace than the Conservatives. This could be a good thing or a bad thing depending on a number of factors. For example, higher spending could help the economy to grow and improve your financial outlook.
Similarly, a perception by lenders that the UK is returning to an ill-disciplined fiscal policy could cause gilt yields to rise and would undoubtedly hurt the UK’s finances by increasing the cost of servicing debt. In addition, it could also reduce confidence in the UK’s future economic growth potential and lead to lower inward investment in the country, thereby reducing the growth rate of GDP in the medium to long term.
Looking Ahead
Of course, a new Prime Minister in the form of Ed Miliband could be a great thing for the UK economy. And, after some initial uncertainty, he could deliver a stunning rate of GDP growth and this could lead to a boost in your financial outlook. However, changes to the status quo could also cause a reduction in confidence and an uncertainty that leads to a worsening in your personal finances.
Either way, a change in Prime Minister will have a major impact upon your financial situation and, looking ahead, this could be an important few months for investors, savers and people with pensions in the UK.
