Expert View: It's the balance sheet that matters, not the ballot box

"It doesn't matter who you vote for, the government always gets in," goes the old saying. And to some extent that was the financial markets' attitude to Thursday's general election. Even a huge upset would have had little or no chance of changing either fiscal or monetary policy.

"It doesn't matter who you vote for, the government always gets in," goes the old saying. And to some extent that was the financial markets' attitude to Thursday's general election. Even a huge upset would have had little or no chance of changing either fiscal or monetary policy.

For all the bizarre campaign strategies, no one in the financial markets believed that a change of government would lead to interest rates of 10 per cent. After all, wasn't the granting of independence to the Bank of England a central plank of the UK's economic stability? And nobody even thought of suggesting taking it away. As to taxes, one look at the accounts and it didn't matter who was chancellor of the exchequer, somehow the spending already under way is going to have to be paid for. Taxes have to rise.

If we look beneath the surface, we can see that the markets have already delivered their verdict on the prospects for this new term. They see a sharp slowdown in UK consumer demand as the interest-rates boost fades, and the tax consequences of the last term come home to roost.

Shares of stocks connected to the UK consumer have been among the very worst performers over the past few month as this growing realisation of reality over rhetoric has been enhanced by poor results and profit warnings from a raft of FTSE consumer companies.

Financial markets have learnt to be suspicious of companies where the finance director is credited with driving the sales and profit growth. Their instinct is to check the balance sheet. One look at the government accounts reveals that Gordon Brown's second-term boom has been largely at the expense of the balance sheet. This, as any accountant will tell you, is not sustainable and Labour's third term is likely to be one of reckoning.

Just as the disappointment of losing the 1992 general election gave way to relief in the Labour Party that they were not going to get the blame for the Exchange Rate Mechanism debacle, so the Conservatives will probably be secretly rather glad not to be around to catch the fallout from this dramatic build-up in public and private debt and the inevitable slowdown it will produce.

Mr Brown and his supporters have told us frequently how accurate his growth forecasts have been; unfortunately his budget projections have been consistently way off - and that is what really matters.

From a business perspective, however, it's not all bad. Mr Brown's greatest achievement is not, as is widely quoted, the granting of independence to the Bank of England - the previous Conservative government had all but done this through what was known as the Ken and Eddie show, where Chancellor Ken Clarke and Governor Eddie George operated an extremely transparent monetary policy. It is rather his pragmatism on two issues: not rushing into the euro, and recognising the importance of the non-domiciled tax status for the leading role played by London in Europe's financial services industry.

The euro received almost no attention during the election campaign, but for financial markets generally, a far more significant vote is likely to be the one at the end of the month when France decides on the European constitution.

A "non" looks likely, assuming that a last-minute planeload of "oui" votes from the French Caribbean doesn't turn up as it did for the Maastricht vote in 1992. If so, investors will start to regard the euro as being as much if not more about the drachma and the lira as the Deutschmark and the franc. More chickens coming home to roost.

Mark Tinker is a director of Execution Stockbrokers. mark.tinker@executionlimited.com