George Osborne Is Spooking the Markets

Just a few days after he became Britain's new Chancellor of the Exchequer, 38-year-old George Osborne reassured Britons that he and the ruling Conservative-Liberal Democrat coalition had a plan to contain the $233 billion budget deficit. He also warned that Britain faced a Greek-style meltdown unless the cuts went through. "Greece is a reminder of what happens when governments lack the willingness to act decisively," he said. The warning was meant to tell voters that the coming fiscal pain is necessary. It also was a swipe at Osborne's Labour Party predecessors for what he called "13 years of fiscal irresponsibility."

Many investors found the direct comparison with Greece inflammatory and unstatesmanlike. "The chancellor may be unaware how dangerous is the ground he is crossing," says Stephen J. Lewis, chief economist at Monument Securities, a London brokerage. "It is irresponsible of him to talk up the scale of the U.K.'s debt problems and to draw parallels with Greece—the election campaign is now over."

Osborne has given government departments until May 24 to cut $8.5 billion from their 2010 budgets, and he has promised a pain-packed emergency budget on June 22. At the same time, he wants to simplify and cut corporate taxes to help business. He suggested he won't raise taxes beyond what was planned by the outgoing Labour government.

Yet for all his decisive steps, investors still worry that Osborne, the youngest chancellor in more than a century, lacks the political and financial skills to guide the nation's finances. Osborne hurt the Tories' quest for a majority by pronouncing late last year that Britain faced a "decade of austerity." He was trying to signal that a Conservative government would not mortgage the nation's future by indulging in reckless Keynesian stimulus. Instead he scared off voters. These gaffes make those who work in London's financial district, known as the City, nervous. A poll taken in the City found its denizens would have preferred that Justice Secretary Ken Clarke, chancellor from 1993 to 1997, return to his old job.

Osborne is a survivor and a favorite of the new Prime Minister, David Cameron. Both attended Oxford, though a few years apart, and both belonged to the same upper-crust dining society, the Bullingdon Club, that has nurtured many careers in Tory politics. Cameron kept Osborne, who shares his vision of modernizing the party, by his side and charged him with coordinating the Conservative strategy in the recent election campaign. Despite the disappointing outcome, Osborne got the job he wanted. "By appointing Osborne as chancellor, Cameron has shown that nothing can be done to separate them," says Tim Bale, professor of politics at the University of Sussex.

The office of Chancellor has always been the second-most-powerful job in British politics. When Gordon Brown, the recently defeated Labour Prime Minister, served as chancellor, he made the Bank of England independent, kept Britain out of the euro zone, and oversaw the biggest expansion in state spending in Britain's postwar history.

Osborne will find it to harder to use that power since his job is to cut. He wants to shrink the budget deficit by more than half in the next four years and argues that tackling bloated costs in the government will be far more effective than raising taxes. His room for maneuver, though, is limited: The health system, most of the military, and international aid programs are off-limits to the budget slashing.

Besides getting Britain on firmer financial ground, Osborne has to convince investors he's the man for the job. "He's lacked gravitas and world experience," says Bale of the University of Sussex. Osborne's budget speech on June 22 could win over the doubters—or confirm their fears.

The bottom line: Markets are jittery about Osborne's lack of experience. Quick, nonpartisan action would calm many investors.

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