In Britain, a Rout Turns into a Race

No matter how uncertain life in Britain became during the global crash and its painful aftermath, one thing seemed sure: Prime Minister Gordon Brown and his Labour Party would get trounced in the next election. Since 2008, the opposition Conservatives have mostly enjoyed a double-digit lead in the polls.

With the election now expected in May, however, the expected rout is suddenly too close to call. A YouGov survey released on Feb. 28 had Labour trailing by just two percentage points, well within the margin of error. Other polls show the Tory lead down to five points, which pollsters doubt would give the Conservatives a clear majority.

That news just about spoiled the Conservatives' spring conference in Brighton. David Cameron, the still young (he's 43) but perhaps not quite so smoothly confident Tory leader (he has been waiting years for this moment), told the party faithful on Feb. 28 that he faced a "real fight" to unseat Brown. "We all know the British people have still got some big questions that they want to ask us," Cameron said.

The tightening race has spooked the currency markets by suggesting the possibility of a hung Parliament, with no party wielding the clout needed to deal with looming budget deficits. The YouGov poll triggered a 3% plunge in sterling over Mar. 1 and 2—11% off its November high—before the currency recovered slightly to $1.51. The Bloomberg consensus is for the pound to climb back to $1.64 by yearend.

How the Tories squandered their advantage is a matter of debate. Just about everyone agrees that the party's pronouncements on the economy, which shrank 4.8% in 2009, have played a big role. The Conservatives have been brutally frank on the need to rein in the budget deficit, projected at 12.6% of gross domestic product for this fiscal year. George Osborne, the party's choice for Chancellor of the Exchequer, wants an emergency budget within 50 days of the Tories' taking power that will freeze public sector pay, cut the cost of central government by 33% over five years, and boost the qualifying age for a pension. Whoever wins the election, he said on Feb. 25, "will have to be tougher than Margaret Thatcher."

The Iron Lady hasn't been Prime Minister for nearly 20 years, and invoking her doesn't necessarily win support today. The Tories' tough talk has coincided with the erosion of their lead as voters worry about losing benefits and public sector jobs. And while the blue-blooded Cameron sports a man-of-the people air, his inner circle has been less successful at showing sympathy for ordinary folk. Although few doubt that a renewed Brown premiership would be austere, voters may reckon it would be kinder than a Tory regime. "Bizarrely, with Labour all over the place [with their message], they are being consistent about protecting the safety net of public services," says Ben Page, chief executive of pollster Ipsos Mori.

Signs of economic improvement are also helping Brown. Home prices were actually up over the past year, and business confidence surveys are looking better. Andrew Hawkins, executive chairman of pollster ComRes, sees Labour gaining as "they get credit for the claim that they put in place the right measures to get out of the recession."

With just about two months left before the expected election date of May 6, the outcome is impossible to predict. A Tory majority, a minority Labour government, or a split Parliament with the third-party Liberal Democrats holding the swing votes are all viable scenarios. The markets have a jittery season ahead of them.

    Before it's here, it's on the Bloomberg Terminal.