Britain too has to convince the markets

This is no time for Brits to sound smug about the troubles faced by their European cousins. The government that eventually emerges from last week’s inconclusive general election is about to receive a terse warning from the Treasury.

It runs roughly as follows: you knew before polling day that the public finances were in a truly dire state, even if you neglected to own up to the voters; well, the news now is worse. If you want to stick to your promises on reducing the deficit you may have to find another £15bn or £20bn in spending cuts or tax increases over and above any previous calculations.

As the politicians have wandered around in an unfamiliar no-man’s land of coalition negotiations, I have detected a certain schadenfreude. Things here may be worrying, but at least Britain is outside the eurozone.

Alistair Darling, a caretaker chancellor while David Cameron’s Tories seek to form a new administration, returned from weekend negotiations in Brussels declaring proudly that British taxpayers had not put one penny piece into the eurozone’s emergency financing facility.

So much for solidarity with Britain’s European partners; the unmistakable subtext was how well Gordon Brown’s government had done in hanging on to the pound. As for Mr Cameron’s government-in-waiting, it could scarcely have asked for a more powerful endorsement of its long-standing pledge never to take Britain into the single currency.

It is true enough that the crisis of investor confidence in Greece and the contagion in other eurozone economies has afforded Britain a breathing space. As they have tested the will of Angela Merkel’s German government to defend the single currency, the financial markets have paid lately scant attention to Britain’s troubles.

This may well change after the apparent success of the weekend package in stabilising the euro. Mr Cameron and the Liberal Democrats’ Nick Clegg have offered reassuring words about putting “deficit-reduction” at the heart of any deal the two parties might strike.

Whitehall officials are warning, though, that investors’ patience with good intentions has a habit of wearing thin. The inescapable fact is that Britain faces a budget deficit as large, relative to national income, as any in the eurozone. As yet it has nothing resembling a serious programme to reduce it.

The politicians said during the election campaign that they all wanted at least to halve the present deficit of about 11 per cent of national income over four years. The parties each offered a few illustrative spending cuts and tax increases. None produced a convincing plan to find the £80bn or so needed to deal with the structural gap between revenues and spending.

The independent Institute for Fiscal Studies estimated that, in its anxiety not to frighten the voters, Mr Cameron’s party spelt out only about a fifth of the cuts in government spending needed to meet its fiscal targets. Mr Clegg’s Lib Dems had done a little better by offering details on a quarter of the necessary savings.

There is a long tradition in British politics, of course, that allows new governments a grace period to take harsh decisions. The Treasury books are opened and declared to be in a worse state than anyone could reasonably have expected. The incoming administration then blames the consequent pain on its predecessor and has several years to win back the voters’ affections.

The difference this time is that, bad as it seemed before the election, the outlook for the deficit has indeed deteriorated. And the new government may well be forced to face the voters again in one or two rather than four or five years.

Officials say that the economic forecasts in the March Budget were over-optimistic. Slower than expected growth is thus set to pour more red ink across the national accounts.

Even before the revision, the outline strategy set out by George Osborne, the Tory shadow chancellor, looked implausible. Mr Osborne said he would go further and faster than Mr Brown’s government in closing the gap; protect spending on health, overseas aid and many benefits; and ensure that 80 per cent of the burden of reducing borrowing fell on spending curbs rather than tax increases.

The Conservatives (like the other two parties) would admit that this meant swingeing cuts in every other Whitehall spending programme, from education to defence, transport to prisons. Now it is clear that even with such unprecedented spending cuts, the numbers simply do not add up. Something has to give.

A new government can cross its fingers in the hope that economic growth picks up again – unlikely given what is happening in the eurozone. It can try to persuade the financial markets to give it more time – distinctly dangerous. Or it can do what the Treasury tells it and announce, alongside the spending cuts, hefty increases in taxation. One thing it cannot afford is to appear, well, smug.

philip.stephens@ft.com