Investors would be wrong to expect much of the fog to clear on the future of British fiscal policy when the Labour government delivers its budget this month.
Opinion polls suggest an election, expected on May 6, is no longer going to be a walkover for the opposition Conservatives, putting Labour's pledge to halve a record budget deficit between 2011 and 2014 back under the microscope.
Warning of a Greek-style crisis, the Conservatives want to get to work this year on the deficit, set to top 12 per cent of gross domestic product in 2010 – similar to Greece's current burden.
But markets are largely in the dark as to how the Conservatives would do that and they are unlikely to get much more information from either party until after the poll.
As such, any major reverse on budget day – a slide in sterling or leap in gilt yields – may look unwarranted.
The Treasury feels it has given markets enough detail for now with a thorough plan for reining in borrowing, and Finance Minister Alistair Darling is not about to change tack. "We will be sticking to the very clear strategy we have set out since the PBR [December's pre-budget report] – supporting the economy through the recession while living within our means in the medium term with a clear deficit reduction plan that we put into legislation," one Treasury insider said.
Mindful of market concerns about national debt levels following the global downturn, the government is enshrining in law its pledge to cut an estimated £178 billion (Dh1.34 trillion) deficit to 5.5 per cent of GDP in the financial year 2013-2014.
Achieving that will require some politically-difficult and big spending cuts and tax rises on top of those already announced – the black hole markets want filled.
A government spending review is being held off until after the election, but the current plan implies many departments could be facing significant cuts of around 17 per cent. "It's lose-lose," said Alan Clarke, an economist at BNP Paribas.
"If you don't announce more details or more tangible measures the market won't like it and, if you do, it will hurt your voting."
Investors are worried that the budget – widely expected on March 24 but not yet announced – could be hijacked by some Labour policymakers eager for some vote-winning measures.
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