SNP-backed Labour government would leave UK looking like 'pre-crisis Spain', says US fund manager BlackRock
04-20-2015
Blackrock, the US investment manager, warned Britain would become a 'disunited kingdom' with mounting debts and rising interest rates in a 'fractious Parliament'
Alex Salmond Photo: AP
By Christopher Hope, Chief Political Correspondent
Ed Miliband will create a “constitutional crisis” if he leads Labour into a power-sharing agreement with the SNP which would leave Britain like a “pre-crisis Spain”, the world’s largest fund manager has warned.
BlackRock, the US investment manager, warned that Britain would become a “disunited kingdom” with mounting debts and rising interest rates in a “fractious Parliament”.
The prospect of a Labour Government paying off the deficit more slowly – and possibly not by 2020 - could see interest rates increase for millions of mortgage holders.
The Scottish National Party is predicted to win upwards of 40 seats and hold the balance of power in Westminster allowing it to support a minority Labour administration, according to pollsters.
BlackRock’s analysis, published on Wednesday, said Britain’s economy was at risk if Labour entered in a power sharing agreement of this sort.
It said: “A Labour-led government reliant on SNP support for key votes would raise the spectre of a disunited kingdom.
“Imagine a similar situation in Spain if the central government were dependent on Basque or Catalan separatists, or a Canada beholden to the Parti Québécois.”
The 12-page report, titled “Ruling Britannia”, said: “Differences on public spending priorities could raise the constitutional stakes in a fractious parliament.
“The SNP favours an expansive approach to public spending, raising the prospects of increased government handouts and an even greater divide in regional benefits.
“Imagine a world where the SNP (and other regional parties) obtain more power over spending and borrowing in return for support on key votes.
“This could turn the UK into a sort of pre-crisis Spain, with mounting piles of regional debt to fund local spending. When fiscal stress hits, markets would look to the sovereign to bail out regional borrowers.”
“Whichever combination emerges, the new administration could preside over a constitutional crisis due to the SNP cohort at Westminster.”
Handing power would fuel demands that Scottish MPs should be banned from voting on English laws.
It added: “We expect sizeable opposition in the rest of the UK to a separatist party voting on UK issues without a reciprocal arrangement in Scotland.
“The debate will likely centre on reforms such as excluding Scottish MPs from voting on English-only issues.”
BlackRock, which has an estimated $4.6trillion (£3.1trillion) assets under management, also warned that Labour’s plans for a slower pace of deficit reduction – independent forecasters say the party could still be running a £30billion deficit in 2020 – could lead to an increase in interest rates.
It said: “Plans by Labour and Liberal Democrats to boost government spending would support regional markets. Yet this could come at the cost of higher bond yields and mortgage rates.
“Backtracking on the pace of deficit reduction would likely lead to a temporary sell-off in gilts and steepen the yield curve.
“It could also result in a rise in inflation expectations and bring forward the timing of interest rate hikes.”
The fund manager warned that the likelihood of an uncertain outcome in the election would be “unusual and somewhat harrowing for the UK” despite being “business as usual” for other European countries.
BlackRock warned that whatever the outcome from the election “a soothing outcome for markets is hard to imagine.
“Labour would be tough on business – and might be perceived as lacking fiscal responsibility.
“A Conservatives-dominated cabinet would pave the way for an unsettling referendum in 2017 on the UK’s European Union (EU) membership.
“Whoever wins – and the result could take time to emerge – will lead a weak government likely to pass only watered-down legislation.”