INTEREST RATES in the United Kingdom will rise sharply and the value of sterling will fall if the Labour Party remains in power after the general election, the Conservative Party has warned.
On a day when sterling weakened further on international markets, the claim provoked furious exchanges between the parties, with Labour accusing the Tories of being unpatriotic.
“Voters must not elect themselves into a financial crisis. Britain cannot afford another five years of Gordon Brown,” said former Tory chancellor of the exchequer Ken Clarke, flanked by party leader David Cameron and shadow chancellor George Osborne. “If investors do not believe the new British government has the political will to deal with the deficit and pay down some debt, they will demand much higher interest rates before they will lend us any more money. It’s a perfectly straightforward argument,” said Mr Clarke.
“Yesterday and today’s movements in the markets just show how nervous our foreign creditors and investors are about the prospects of a victory for Gordon Brown or a hung parliament.”
Sterling fell 0.5 per cent against the dollar yesterday to $1.4920, and some analysts argue it could drop near or below $1.40 before the election campaign ends, particularly if a hung parliament is the likely outcome. The British currency also fell against the euro.
However, a Bank of England auction of £2 billion worth of government debt sold well, though there are indications that the markets no longer rate British debt as triple-AAA rated in practice, since gilt yields are now higher than Italy’s for the first time in 18 months.
The gap between the interest rate that the UK and Germany must pay for 10-year debt has risen from 0.35 percentage points to 0.9 since last November, as the UK emerged more sluggishly than others from the recession.
So far the Tories have insisted that action must be taken quickly to cut the UK’s spiralling deficit, though it has produced plans that would shave little more than a billion of the coming year’s £180 billion deficit.
However, Mr Clarke – who left the treasury in a healthy state when he left office in 1997 to be replaced by Gordon Brown – said international markets understood that not everything could be done at once, but strong signals would be needed to satisfy them. “We’ve got 50 days to give some confidence to our creditors that we are capable of putting into practice our determination to get the structural deficit largely out of the way in the first parliament and that we are creditworthy for the further finance we will need,” he said.
However, the chief secretary to the treasury, Labour’s Liam Byrne, said the Conservatives were deliberately trying to talk the UK into a pre-election financial crisis to frighten voters.
“Today the Tories crossed a line and showed they were willing to hurt Britain in order to help themselves. In an act of desperation, they walked into the City and tried to talk down the pound,” he said.
“We know they’re suffering a loss of confidence lately but trying to win it back by undermining confidence in the British economy is reckless and irresponsible. It’s desperate politics, reckless economics and about as unpatriotic as it gets,” he said.
The more strident tone from the Tories illustrates the nervousness within the party as opinion polls narrow. The party is also frustrated about Mr Brown’s ability to retain confidence over his economic management.
Warning that the UK’s productivity, wealth, and number of manufacturing jobs have all fallen during Labour’s years in office, Mr Osborne said “some people still entertain the idea that under Gordon Brown, the fundamentals of our economy have been strengthened”.