U.K. Talks Go `Really Well' with Focus on Deficit

Liberal Democrat lawmakers demanded more details from David Cameron’s Conservatives on their proposed alliance’s policies on a voting-system overhaul and taxation, as the parties struggled to form a government after the U.K.’s inconclusive May 6 election.

“The parliamentary party have asked for clarification of details in relation to education funding, in relation to fair taxes and in regard to voting reform,” Liberal Democrat negotiator David Laws told reporters after a meeting in London. Still, he said, “We’ve had good discussions and made very good progress.”

Any potential agreement would focus on deficit-cutting, spokesmen for the parties said, as they emphasized common ground in a bid to reassure investors. The jockeying threatened to roil markets as Europe grapples with a sovereign-debt crisis and Britain faces a record budget shortfall.

“This was the worst possible time for this,” said Stuart Thomson, who helps manage the equivalent of about $100 billion at Ignis Asset Management in Glasgow. “We have a very febrile atmosphere over sovereign debt. Our view is that sterling is undervalued, but without a stable political situation and Conservative fiscal policy, it could go down further.”

Photographer: Toby Melville/WPA Pool/Getty Images

David Cameron, right, and Nick Clegg, stand during a Victory in Europe day ceremony. Close

David Cameron, right, and Nick Clegg, stand during a Victory in Europe day ceremony.

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Photographer: Toby Melville/WPA Pool/Getty Images

David Cameron, right, and Nick Clegg, stand during a Victory in Europe day ceremony.

The pound added 1.1 percent to $1.4973 at 4:38 p.m. in London. The 10-year gilt yield rose 9 basis points to 3.92 percent.

‘Surprised If Deal Today’

“We’ve got to let the negotiators negotiate,” Liberal Democrat energy spokesman Simon Hughes told reporters. “I would be surprised if there was a deal today.”

Both Laws and Hughes said contacts would also continue with Prime Minister Gordon Brown’s Labour Party.

“Deficit reduction and a plan to bring down the deficit as soon as possible must be at the heart of any agreement,” Laws said.

Changes to Britain’s first-past-the-post electoral system, which gave the Liberal Democrats 9 percent of the seats in the House of Commons for 23 percent of the popular vote, are at the heart of the party’s demands.

The negotiations were triggered by the first election since 1974 that failed to produce a majority. Brown, who remains prime minister and Labour leader, had his first post-election meeting with Clegg yesterday.

Seat Breakdown

The Conservatives won 306 districts in the vote, a net gain of 97 from the previous election in 2005. Labour had a net loss of 91 seats to end with 258. The Liberal Democrats lost five seats and now have 57 members of the 650-seat House of Commons.

Clegg said Conservative leader David Cameron was entitled to the first chance to form a government since he won the most votes and Parliament seats.

The parties disagreed during the campaign over Cameron’s proposals to cut spending this year and lower inheritance taxes and Clegg’s bid to eliminate income taxes on those with the lowest incomes.

“The most likely outcome is a deal between the Conservatives and Liberal Democrats,” said Tim Bale, author of “The Conservative Party From Thatcher to Cameron.” “There has been a shift in tone, emphasizing what they have in common compared to their differences. Brown will be gone by mid-week unless it all collapses.”

The scope of a deal ranges from a coalition, with Liberal Democrats in the Cabinet and agreeing to support Cameron in Parliament, to a “confidence and supply” agreement. In that arrangement, Clegg promises not to oppose the Conservatives on budgets or any issue where defeat would force an election.

Smaller Parties

Brown has offered Clegg a referendum on the electoral system. Even if they agree on other matters, Labour and the Liberal Democrats together wouldn’t have a majority, and would need to bring in two other smaller parties.

And even if that could be achieved, Brown may not be able to deliver his own party. In his 2 1/2 years as Labour leader, Brown has struggled to unite it behind him, fending off at least three coups. Two Labour lawmakers, Kate Hoey and John Mann, have already called for Brown to step aside.

“Gordon Brown seems the least well-placed leader” to lead a coalition, said Jane Green, a lecturer in politics at Manchester University.

Cameron has his own problems with his party, having failed to deliver a Parliamentary majority. He’ll face lawmakers at a meeting in London today at 6 p.m.

“I would rather be in a minority government,” said lawmaker Graham Brady, who suggested another election may be in the offing before a full term is completed. “Realistically, there’s not much more prospect of whatever arrangement is reached lasting for very long.”

To contact the reporter on this story: Thomas Penny in London at tpenny@bloomberg.net; Kitty Donaldson in London at kdonaldson1@bloomberg.net.

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