Britain on the brink

It is a calculation that should fill all of us with an immense sense of dread: there is now a 72.2 percent chance of a hung parliament. Or so says Michael Saunders, Citigroup's chief European economist and the one man in the City everybody listens to when it comes to the interaction between parliamentary politics and the financial markets.

His model, which incorporates the standard data about the Westminster first-past-the post system, and into which he has fed all of the latest polls, also suggests that there is just a 6.2 percent chance of strong Tory majority, a 19.1 percent chance of a weak one and 2.5 percent chance of a Labour majority. Given the terrible state of our public finances, and Britain's desperate need for a strong government with a clear commitment to fiscal reform, all of this is little short of disastrous, as I argue in today's cover story in the magazine. No wonder the financial markets are so spooked: after months of assuming a Tory victory, they are starting to price in chaos and uncertainty, hence the collapse in sterling and spike in gilt yields.

There is simply no way that the UK can muddle through its fiscal problems. The budget deficit will hit at least £171bn for 2009-10, close to 12 percent of GDP, the highest for around 60 years. Gordon Brown and Alistair Darling are still spending as if there were no tomorrow, in a desperate bid to buy votes in the run up to the election: central government current spending jumped 5.8 per cent in April-January. The International Monetary Fund believes our debt to GDP ratio will hit 98 percent by 2014, largely because growth is likely to under-shoot the government’s widely optimistic forecasts. Needless to say, this doesn't include the state’s vast off-balance sheet liabilities, namely pensions for government employees and many private finance initiative projects.

The cover story also explains why the myth of a workable coalition government in Westminster should not be taken seriously. History shows that our adversarial system simply does not accommodate it.

Greece is now considering turning to the IMF for help. Britain's overall position is not quite as bad, if only because we retain control of our currency and central bank. But in the absence of an electoral miracle which delivers us a strong government with a working majority, we too could soon be facing the humiliating prospect of having to go cap in hand to the global bureaucrats for an emergency loan. What a terrible year 2010 is turning out to be.