Bryan Johnston: Alistair Darling's last stand leaves UK gilt-ridden

ALISTAIR Darling faced an unenviable task. For a start, not only was last Wednesday's Budget the last of this parliament, it was probably his last as Chancellor. On the assumption the general election takes place at the beginning of May, the next Chancellor will probably either be George Osborne, Vince Cable or Ed Balls.

Darling's task, therefore, was to sound responsible but realistic in outlining an economic plan for the next five years which could be inherited by his successor without undermining Labour's credibility as a responsible economic manager. Did he succeed?

To some extent his task was made easier by the turmoil of the past 18 months. He can argue that the economy's dire plight is not as a consequence of his policies – an implicit criticism of Gordon Brown when he occupied No 11 Downing Street – but was caused by all those irresponsible bankers on both sides of the Atlantic who eventually had to be rescued to save the entire economic structure. As a result, his actions over the past year were forced on him.

Did the financial markets swallow this conceit? Certainly, the initial reaction was pretty muted. Government bonds firmed a little, drawing some comfort from indications that the coming borrowing requirement will be marginally lower than the previous terrifying figure.

Even so, the pound fell nearly a cent against the dollar, although it did firm against the euro as a result of the downgrading of Portugal's credit rating, which reinforced the predicaments of Greece and other weaker members of the European Union.

Most of Darling's other measures were cosmetic: doubling the stamp duty exemption threshold for first-time buyers to 250,000 but increasing the charge to 5 per cent for properties over 1 million was pure politics.

There was the usual ritual dance over "vice" taxes; this time both infuriating the Irish and residents of Somerset by significantly increasing the duty on strong cider, which will probably simply persuade drinkers to look elsewhere. All in all, his measures did not leave Labour open to accusations of buying votes through fiscal irresponsibility. David Cameron's spirited reply scored points but failed to focus attention on what many believe is the result of the Prime Minister's economic illiteracy rather than a financial shambles caused by world events.

The Budget was, in truth, pretty academic. At some point within 50 days of the general election, the new Chancellor will deliver Budget proposals, and pretty unpalatable they are likely to be. Even if the gilt market was not particularly spooked by what Mr Darling had to say, there is still a requirement to sell 187.3 billion of gilts in the next 12 months – a little under 3,000 of government debt for every UK citizen.

It is often forgotten, moreover, that gilts carry an interest payment. They will raise capital, but at a price. Even if Darling's forecasts on growth are met, at 1 per cent – and many think this target still a little ambitious – this hardly heralds a vast influx of tax revenues. The UK is not going bust, but if the US recovery picks up speed it seems inevitable that the pound will fall.

If, at the same time, the continental leaders can stop bickering and manage to find a way of extracting Greece, Italy, Spain and Portugal out of the financial mire, the euro should recover against the poor old pound.

It is widely assumed that UK interest rates will not rise much in the next 12 months, but I am not so sure. A weaker pound imports inflation, an event which will have to be curtailed by a more orthodox monetary policy, while the need to sell government bonds will demand a reasonable price for the paper.

Darling's swan song was the financial equivalent of a careful row around the harbour. Beyond its walls the seas are turbulent and quite capable of swamping an unstable craft.

The issue for the financial markets will be to judge the seamanship of the next Chancellor. Judgment will be suspended until details of the June financial statement are known.

One thing is certain: it is likely to be singularly unpleasant in content. If, as I believe, Mr Cameron prevails, but with only a small working majority, it will be interesting to watch the extent to which the need for courageous, decisive action early in his administration is compromised by bloody minded backbenchers, empowered by the authority that a wafer thin mandate secures. This could dictate an economic strategy predicated on vested interest which must be bought-off for support.

Mr Darling is to be congratulated for delivering a Macavity Budget which really wasn't there. The financial lion that roars in June might be much more terrifying.

Bryan Johnston is a director at Brewin Dolphin