Can a minority Conservative government survive? Let's look at the maths

Following the unexpected failure of the Conservatives to secure a majority in Theresa May’s snap general election, the UK has its second hung parliament in seven years. With 318 seats, the Conservatives fell eight seats short of a majority, though in reality, they are four short, given the abstentionist policy of Sinn Féin, which won seven seats. Labour, with 262 seats, fell short by 60. Attention naturally focused first on whether the Conservatives could form a government.

The available options were a formal coalition with another party or a Conservative minority government. The prospects of a Conservative-led coalition were limited. After the damage inflicted on the Liberal Democrats by their coalition deal with the Conservatives in 2010-15, the centrist party ruled out any reprise. There was also no chance of a Conservative deal with the Scottish National Party (SNP), which won 35 seats but which is resolutely opposed to the Tories on both constitutional and economic questions. It appears that no one has even contemplated a grand coalition between Labour and the Conservatives, an arrangement that works in Germany but which is alien to the UK other than in wartime.

That left one coalition option for the Conservatives – involving Northern Ireland’s Democratic Unionist Party (DUP), which won ten seats. While that would have locked in the DUP to unpopular decisions, it appears to have been opposed by many Conservatives. It would have been a particularly difficult pill to swallow for those critical of the DUP’s socially conservative stance on same-sex marriage and abortion.

Theresa May, the prime minister, has therefore sought to form a minority government, relying on support from the DUP. If it entails a “supply-and-confidence” agreement, then the DUP would support the government in confidence votes, including the Queen’s speech (which sets out the government’s legislative programme), and on financial votes, particularly the budget. All other votes would be decided on a case-by-case basis. In return, the DUP would hope to extract some policy concessions, probably on public spending and welfare.
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UK election 2017: Why the hung parliament spells trouble for its economy

Theresa May’s snap election wager has backfired. The supposed “Brexit election” was intended to signal the public’s support for the prime minister’s approach to the UK’s departure from the European Union. Instead, it has left her incredibly weak, without even a majority in government and her future as leader uncertain. And the economic data reflects this.

Markets hate uncertainty. One measure that tracks this is the UK’s index of Economic Policy Uncertainty, which shows diminishing confidence around the country’s economic resilience. It is calculated by tracking daily articles relating to economic and political unrest in more than 650 newspapers in the UK. The higher the number, the more turbulent the economic outlook. The index surged from 286 on May 18, 2017 to a staggering peak of 521 on June 8 2017, the day of the general election.

This is significant because higher levels of uncertainty are associated with greater stock price volatility and reduced investment and employment in key areas of the economy like healthcare and infrastructure.

The UK’s rising uncertainty levels stretch back to its EU referendum on June 23, 2016. Since then, GDP growth increased by only 0.84% while inflation rose by 1.09%. Uncertainty around the UK’s future relationship with the EU and the Brexit negotiations has caused sharp movements in currency markets as a result of investors hedging their bets and speculating on trades. The day after the referendum, the euro to sterling exchange rate fell by a massive 6.2% overnight, while economic policy uncertainty hit a record value of 2,661. It fell a further 5.1% from June 2016 to May 2017 and 3.42% during the month of May 2017, alone.

The next graph shows the daily linkages between the euro to sterling exchange rate changes and economic policy uncertainty since May triggered Article 50 on March 29, 2017. A negative value implies that as the uncertainty index increases, the sterling to euro exchange rate tends to fall.
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