David Prosser: The Tory-Labour divide is a political, not economic, one

Outlook: What might Britain look like if, against the odds, Gordon Brown were to win an unprecedented fourth term for Labour this spring? Well, one picture might be of a country with more people employed in export industries – and with many of us more inclined to holiday at home.

This is not to make a judgement about the economic policies of Labour or the Conservatives, but it is a plain fact that the markets have been more inclined to dump sterling when Mr Brown's chances of re-election have seemed higher. Yesterday's sell-off, prompted by a further recovery in Labour's opinion poll rating, partly reflected the markets' fears of the uncertainties that a hung parliament might bring, but was also a continuation of the trend of recent months, which has seen sterling's fortunes rise and fall broadly in line with those of the Tories.

That rather suggests George Osborne has enjoyed some success in cultivating an image of fiscal responsibility, despite the fears of many in the City about the shadow Chancellor's economic inexperience. It appears the markets have fallen for the story that this election offers a choice between a Labour Party that would put off deficit reduction for a year or so and a Conservative Party that would begin the job straight away.

I say "fallen for" because the idea that there is some mammoth divide between Mr Osborne and Alistair Darling on when to start work on cutting the deficit is a myth. The myth suits both Labour and the Conservatives, but the truth is that the outlook is similar whoever is Chancellor following the election. There will be a token attempt to cut the deficit in the financial year – the 50 per cent top tax rate won't be dumped by the Tories, for example – with the real pain to be felt from 2011 onwards.

For what it is worth, the Liberal Democrats' policies on debt reduction would not be too dissimilar either (all three parties would have different spending priorities, but all would make substantial cuts in the round). In other words, a hung parliament would not bring the hotch-potch of uncertainty, at least on this issue, that the markets seem to fear.

Still, the weakness in the pound is, for now, doing us some favours – witness the latest improving update from the manufacturing sector yesterday. Though there is political capital in being able to point to a strong currency, the economic dividend is currently more useful.

What's clear, however, is that the political debate is miring the view of economic reality. It may also be causing other problems: the main parties' reluctance to offer much in the way of detail on policy, lest they hand their opponents a stick with which to beat them, is making it very difficult for the business sector to plan for the months and years ahead.

Indeed, as accountants at BDO pointed out at the weekend, the Bank of England, which is due to meet this week to discuss interest rates and quantitative easing, may also find it difficult to work out what to do next on monetary policy in the absence of a clear lead on post-election government policy.

BDO even fears that without better news to the contrary, businesses are likely to assume the worst about what lies ahead, cutting back on capacity to such an extent that there is a risk of an inflation spike when the recovery does gather momentum. That might force the Bank of England to raise interest rates more quickly than it would otherwise like.

In other words, the sooner we get the election out of the way, the better. Not because there really is a huge divide between the parties on economic policy, or even because one party offers a rosier future than the other. No, the damage comes from the perception – however misconceived – that there is now huge uncertainty about the shape of Treasury policy to come.