Could we see a second UK General Election in 2015

This question has been asked several times in recent weeks with both bookmakers and commentators highlighting the potential for a second election this year. The chance of a second general election within a year poses a risk to the strength of the GBP – at a time when investors should be preparing themselves for an interest rate hike in 2016 – and UK government bonds.

In this article, I will explain how we could see another election this year and what the consequences would be for the markets and investors.

How might there be another snap election?

In 2011 the Fixed Term Parliaments Act was enacted, resulting in a general election taking place every five years on the first Thursday in May. There are a few reasons for this. First and foremost, the certainty of a five-year term allows governments to act with a greater degree of flexibility and set specific dates for targets to be implemented without fear of a snap election being called. Secondly, it removes the potential for the PM to call a snap election when it best suits them i.e. when their party are polling high mid-way through Parliament.

There are two ways in which a five-year electoral term can be broken.

1. Vote of no confidence

There could be a motion of no confidence put forward against the current government. This would have to pass with a majority vote in Parliament. There are 650 MPs sitting in the house and so this would require a yes vote by 326 MPs (or 323 assuming Sinn Fein continue to refuse their seats in Parliament). Once a no-confidence motion is passed, the incumbent government has two weeks to receive a vote of confidence by a majority, which would counter the original no-confidence vote. This would require a large deal of negotiating with the smaller parties. If a confidence vote is not passed within two weeks, a new election would be called.

2. Vote for a General Election

This would be a simple vote in the house requiring a two-thirds majority to be passed. If successful, a new election would be called immediately. Otherwise, the motion fails and the current government’s dynamics continue.

So will there be a second election this year?

We should put a two-thirds vote on a General Election to one side. For there to be a second election to happen this year, it would be triggered by a no-confidence motion passing in the house.

So let’s focus on the chances of a no-confidence vote.

I can see this happening with two scenarios playing out; a minority government that cannot govern or the collapse of a coalition.

A minority government that cannot govern

This would be a minority government that is reliant upon a vote-by-vote agreement with a minority party for support. This is a potential scenario that’s already being well mooted by the SNP, who could provide vote support to a Labour minority government. In the same breadth, I also think this is a very likely option for the Conservatives, who would get vote support by the Lib Dems and UKIP.

The immediate focus of any minority government is to confirm a Queen’s speech and pass its 2015 budget. A failure on either of these two fronts would leave the minority government in complete and utter limbo. The reaction to the UK specific markets i.e. GBP, FTSE and UK gilt yields, could be dramatic and aggressive. A continued failure of the minority government to pass these crucial pieces of governmental businesses should see a no confidence motion posed and a new election called.

Should these two pieces pass through unscathed, there are of course the chances of a no-confidence motion passing later down the line. This would come if the minority government feels it simply cannot govern or pass any of the legislature it has planned as part of its manifesto (even with a toned down vote-by-vote deal). Quite simply, this could see a complete breakdown in the original vote agreement with a minority party, and see the minority party switch sides to the other major party. A no-confidence vote would then be the next natural step towards a change in government.

Collapse of a coalition

This would happen if the coalition, like the marriage of an estranged couple, completely shuts down and breaks up. This could well happen within the next Parliament given the fact that politicians have now digested the dynamics of what a coalition government looks like, what works, what doesn’t, and perhaps most importantly, the consequences for the minority party.

Just look at the Liberal Democrats. The Lib Dems rose to power in 2010 by traditional Labour supporters vacating the Labour party and choosing Lib Dems. The Lib Dems were polling at 27% before the 2010 election and ended up winning 57 seats. Today, they are polling at just 9% thanks to voters being completely frustrated by the Lib Dems being steamrolled by the Tories when in government. Any coalition minority party will be highly sensitive to this consequence and could prove to be much harder-nosed when it comes to negotiating, hence heightened risks of a fall-out. I for one think any coalition between the Tories and Lib Dems this time around will be much more volatile than during the previous five years, particularly given how many Lib Dem backbenchers want nothing more to do with the Tories.

Conclusion

The biggest chance of a new election in 2015 will come from a minority government. In this sense, with most of the electoral maths pointing towards a minority government with the Conservatives (unless Miliband does an about-turn and combines with the SNP), there is a very real risk of a new election within the next year.

There is every chance that any Tory combination with the Lib Dems will come with much more vigour from both sides and the Lib Dems will be highly sensitive to the party’s current polling numbers. A Tory/Lib Dem deal would be an opportunity for the Lib Dems to save face and rebuild support. At the same point, the major party NOT in government will seize upon any opportunity to discredit the minority government and sway the public so that they can seek a new election and get into power.