It's election time – hang onto your wallet

Who will win the general election? And what will it mean for you and your money? Matthew Partridge and John Stepek report.

You may have heard of Nate Silver. He's something of an election statistics guru. In the last two US presidential elections, he won plaudits by correctly predicting the outcome in 99 of 100 individual state elections (the only one he got wrong was Indiana in 2008). That's an impressive record.

This week, the polling genius gave the BBC's Panorama programme his take on who'll win Britain's general election. His answer? "I have no idea." It'll be an "incredibly messy outcome".

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It's hard to knock his prediction. According to Silver, the Conservatives will win the most seats, but not enough to secure a majority, even with the Lib Dems in tow. (Our own election commentator Adrian Sykes gives his latest view on the odds in the box below.)

You can argue that every election is uncertain 2010 was hardly a sure thing, for example. But 2015 is uniquely so, not least in that the balance of power could be held by the Scottish National Party, a party which explicitly wants to break up the UK.

And while it's easy to get jaded about the apparently superficial differences between the men most likely to end up being prime minister which middle-aged Oxbridge graduate will you vote for? each party's policies would have wildly diverging impacts on your finances if they actually got into power.

So what can you expect if each of the parties wins the election? We look at the impact on the most important aspects of the economy and investments below.

Public spending

Public spending has been a hot topic during the campaign, with each side accusing the other of making promises that can't deliver. So let's turn to a neutral party the respected think tank, the Institute for Fiscal Studies (IFS).

The IFS has criticised all of the main political parties for being vague on their plans for tackling the deficit, leaving the public to take their forecasts on trust. While the Conservative party is clear about the size of its spending cuts, it doesn't say how they can be achieved.

By contrast, Labour is relatively clear about the areas it would cut, but evasive in terms of the overall size. (Note that when we talk about cuts here, we mean "real" terms cuts in other words, after inflation).

The Conservatives will aim to balance the overall budget and produce a surplus by 2018-2019 in other words, we'll make a start on paying down our huge national debt. However, the party has also committed to cutting overall taxes by around £100m, as well as ring-fencing spending on the NHS, foreign aid and schools.

This means that, even if it managed to raise a hoped-for £5bn from anti-tax-evasion measures, we'd still need to make £10bn in further unspecified social security cuts, as well as £30bn in cuts to other departments. This means one of three things: "unring-fenced" areas will be cut to the bone; ring-fenced areas will be cut too, despite promises not to; or the deficit target will be missed.

Labour, on the other hand, has committed to a more modest target of balancing the current budget (excluding spending on investment) in the same timeframe so they'd stop overspending, but wouldn't make a dent in the overall debt. (When we say "stop overspending", spending will keep rising it's just that tax revenues will rise to offset that.)

Labour would also try to boost revenue by raising taxes on the better off, and on banks. Interpreted narrowly, this could allow the party to get away with far more modest cuts, and shield the aid, NHS and education budgets from spending cuts.

The Lib Dems' plans fall in the middle. Like the Conservatives, the party is vague on where to cut and relies on a "highly uncertain" prediction of raising £10bn from tax evaders. The SNP has similar spending plans to Labour, but if it is to stick to its planned budget, any increases in social security would need to be balanced by bigger departmental cuts. As the IFS puts it, its "stated plans do not necessarily match its anti-austerity rhetoric".

We all know politicians' spending promises are even less reliable than their other promises. And as Gordon Brown amply demonstrated during his tenure, with all his talk of "golden" rules, it's easy to make the figures tell the story you want them to. But as the IFS says, while Britain is in better fiscal shape now, it is still heavily indebted. "The next government still faces the task of finishing the job of reducing borrowing back to sustainable levels."

It may not seem important now with bond prices at bubble levels and yields (and therefore countries' interest payments) at record lows. But at some point in the future, markets might care about this sort of thing again (our regular contributor James Ferguson will talk about the danger posed by the bond bubble in next week's issue).

The danger then, as the IFS puts it, is that "higher debt entails higher debt interest payments, which would potentially leave the government less well placed to deal with future adverse events". So having a government in charge which is convincingly committed to getting the debt under control as happened in 2010 is important.

A panic in the gilts market or sterling might not materialise immediately, but the more anti-austerity the government, the more likely we are to see yields rise and sterling slip.

A more immediate problem might occur with an indecisive result. The threat of a repeat election could rattle markets. Or the threat of an imminent re-run of the Scottish independence referendum which could happen given a sufficiently high SNP showing and a weak minority government in Westminster would also be rattling.

In short, we wouldn't be big buyers of gilts in any situation (they look poor value) and it's a good idea to hold a diverse portfolio don't have all of your money in sterling-denominated assets. For example, we like European and Japanese equities, plus some China for the more adventurous. And it's a good idea to have a bit of gold in your portfolio, in case of financial turmoil.

House prices

Housing is becoming a major election battleground. Polls suggest that more people are worried about affordability than at any time since the last bubble burst in 2007, with both young people and their parents getting worried about how they'll ever be able to "get on the property ladder". So it's a big issue, and one in which both parties are trying to grab potential swing voters with blatant and cynical bribes.

Both main parties are threatening to impinge on private property rights. The Tories want to extend Right to Buy to housing association properties. In other words, they would force the owners of privately held properties (housing associations aren't government-owned) to sell them at a discount to existing tenants.

Meanwhile, Labour plans to impose rent controls and to allow the confiscation of landbanks (again, privately owned property) from developers. Both are fiddling pointlessly and expensively on the margins with Help to Buy and inheritance tax (Tories) or stamp duty cuts and taxes on "mansions" (Labour).

The short-term problem is that house prices are hugely distorted by loose monetary policy, and the fact that the banks are happiest lending against repossessable assets of relatively clear value. No government can or will fixthat the blame for that lies in the hands of the ostensibly independent central bank, and governments are happy to leave it there.

But none of the parties has a plan to tackle the longer-term problems with Britain's dysfunctional market either. UK property is in the mess it's in due to an unholy combination of planning distortions, overly favourable tax treatment, rules stacked in favour of owning rather than renting, extreme suspicion of pensions and the financial industry due to years of mis-selling, and no doubt patterns of ownership and legislation dating back to Norman times.

Tackling that takes time, intellect and guts that our politicians just don't have. Instead, they are obsessed "with measures to subsidise home ownership, rather than boosting supply", as the Financial Times sums up.

In short, politicians would rather issue short-term bribes to target specific sectors of the electorate rather than get their hands dirty with questions about the green belt. So don't expect any solutions.

But what will happen to prices? Much of the recent boom has centred on London, which in turn has centred on the UK's attractiveness to wealthy overseas buyers. Both main parties want to make tax avoidance a dirty word, but Labour is the more obviously hostile to the well-off, with its mansion tax, reintroduction of the 50% income tax band, and promise to scrap non-dom status.

This, combined with the "chilling" effect on buy-to-let investors that would likely be caused by the threat of rent controls, suggests that prices would be more likely to fall particularly at the top end under a Labour-dominated government. But the main factor remains mortgage affordability, which is largely driven by interest rates and gilt yields.

Tax

Tax is probably where the biggest differences lie. The Conservatives would rather hold spending down than raise taxes. The Labour party would rather raise taxes and be more free with spending. This week, David Cameron made the rather rash promise not to raise income tax, VAT or national insurance between now and 2020. He might live to regret that, but it draws a philosophical line in the sand.

The Conservatives also want to raise the inheritance tax threshold for main residences to £1m, and to increase the 40% income tax threshold. Labour, on the other hand, plans to raise the top level of income tax back to 50%, introduce a 10% starting rate, and impose a "mansion" tax on properties worth more than £2m which the history of "new" taxes suggests we'll all end up paying some day.

Investments

In terms of the stockmarket, you don't have to be partisan to see that the biggest threat to share prices comes from Labour. So far Ed Miliband wants to cap energy prices (bad for utilities) and rail fares (bad for transport groups), and it's hardly a stretch to imagine that debates over some form of renationalisation for both sectors might come up during the parliament.

However, certain sectors look vulnerable regardless of who wins tobacco looks ripe for attack from any cash-strapped future government (particularly one that has ruled out most other forms of tax hike), as do the ever-unpopular banks, while outsourcers could be vulnerable to either losing contracts or having more restrictive terms.

Finally, one thing is near-certain, whoever gets in if you're a highearner, your pension is in the firing line. The Conservatives want to gradually cut the amount you can contribute to a pension for every penny you earn over £150,000. Once you are earning £210,000, the contribution will be capped at £10,000 a year. Labour will reduce tax relief above the £150,000 level, tapering it to 20% by the £180,000 level.

The IFS has called both parties' plans "misguided", reckoning these tweaks over-complicate the system. But the think tank doesn't believe the pensions system should stay as it is instead it thinks a long hard look at the 25% tax-free lump sum and the fact national insurance payments aren't charged on employer contributions (which cost £14bn in the 2013/14 tax year) is the answer. In short, if you're paying 45% tax and you'd like tax relief on your pension savings, top up now.

What happens if no one wins a majority?

As Adrian Sykes notes below, writes Matthew Partridge, bookmakers expect no one party to win a majority betting exchange Betfair estimates there is around a 90% chance of a hung parliament. If that's what we get, then the negotiations to form a coalition will start on Friday 8 May. Just as Gordon Brown remained prime minister in the immediate aftermath of the 2010 election, David Cameron would stay while talks continued.

The likelihood that the Scottish National Party (SNP) will win big in Scotland means it's possible that even a Conservative-Liberal or Labour-Liberal coalition couldn't form a majority. So the talks may not conclude with a formal coalition, but with a "confidence and supply" agreement.

In this case, one or more of the smaller parties would agree to informally back the new government's agenda, or at least not support a vote of no confidence against it. That party would then attempt to govern with a minority of MPs.

While there is no set deadline, the formal opening of parliament by the Queen on 27 May is seen as the decisive date (yes, the pain could stretch out for that long!). On that day the government is expected to outline its legislative agenda, with the Commons then making a non-binding vote on the speech.

As the FT's George Parker and Kiran Stacey point out: "if neither can win support for their legislative programme on that day, a second election in the autumn is almost inevitable". Indeed, an indecisive result in the February 1974 election led to a repeat in October.

Another factor that complicates matters is the Fixed Term Parliaments Act. This removes the ability of the prime minister to unilaterally dissolve the House of Commons and trigger another election. This means an unstable multi-party "zombie" coalition could be agreed, but then have a lot of its legislation defeated. However, it would be bound together unless it was defeated in a vote of confidence.

What are the odds?

The opinion polls are of limited use in this election, notes Adrian Sykes: the impact of minor parties on the two major players, and the role of local voters staying loyal to incumbent MPs, particularly Lib Dems, are not captured by national polls and are hard to predict. So I prefer to "follow the money", monitoring the bookies' odds instead. As of the time of writing (28 April), the odds are showing a knife-edge contest, as the table shows.

I suspect that, on the day, the Conservatives will get more votes than the polls and the odds might suggest they have the incumbent advantage, and once voters hit the booths, they may be more inclined to vote Tory than they let on. So I think Cameron will win just. But we may be heading for the lowest voter turnout in post-war history, in England at least.

Read more from Adrian Sykeshere.