Investors are fearful that the coming election will produce a hung parliament and a weak minority government unable to tackle the gaping hole in the public finances.

They are right to be worried. The peculiarities of the electoral system mean that the Conservatives need to win a much larger share of the vote than Labour to obtain a majority of seats in the House of Commons. In addition, the economy – a key electoral battleground – is currently less unfavourable for Labour than is widely assumed.

The scale of the Conservative challenge is illustrated by “swingometer” calculators that project numbers of seats based on voting intentions. Assuming a uniform national swing, the Tories need to win at least 40% of the vote and lead Labour by 10 percentage points to achieve a Commons majority. Labour, by contrast, requires only a one percentage point advantage for an outright victory.

Recent polls have been volatile but on average show a narrowing of the Conservative lead since the autumn. The last four ICM polls since October, for example, have reported Tory/Labour differences of 17, 13, 11 and nine percentage points respectively.

Based on historical analysis of influences on voting intentions, Labour’s mini-revival is no fluke but reflects better economic trends. The Tory lead, moreover, could be cut further over the near term, magnifying worries about a hung parliament.

The boost, however, is likely to be temporary, with the economy turning against the government again from early 2010. This suggests that Labour’s chances of frustrating the Tories will diminish the longer an election is delayed.

With gross domestic product (GDP) yet to recover after a 6% plunge, it is controversial to claim that the economy has become less of drag for Labour. Voters, however, focus on influences on their personal finances rather than abstract concepts such as GDP.

Historically, support for the governing party relative to the main opposition has benefited from rises in pay growth and house price inflation while suffering when general inflation, interest rates and unemployment increase.
 
In early 2009, Labour support was eroded by a sharp rise in jobless numbers, widespread pay freezes and falling house prices. The damage, however, was limited by Bank of England interest rate cuts and a big decline in inflation, partly due to last year’s VAT reduction. More recently, the increase in unemployment has slowed sharply and house prices have recovered.

Based on current economic readings, the surprise is not that the Tory lead has eroded but that it remains at about 10 percentage points. The historical analysis predicts a much smaller gap, consistent with Labour being the largest party in a hung parliament.

On one view, Labour’s failure to rally by more reflects the party’s core unpopularity, implying dismal electoral prospects. The polls, however, may simply be reacting with a longer lag to economic changes, suggesting a further narrowing of the gap.

The trouble for Labour strategists is that the current economic boost is likely to prove short-lived. Rising inflation, in particular, threatens to undermine government support in early 2010.

The annual rate of change of the Retail Prices Index has already moved up from a low of minus 1.6% in June to plus 0.3% in November. It is likely to climb to about 4% by spring 2010 as a result of the VAT reversal and higher energy and housing costs.

Labour has a window of opportunity. The party’s strategists must aim to narrow the gap between its poll rating and current economic “fundamentals” and – if successful – call an early election. The arithmetic gives Labour a good chance of leading a minority government with only a modest further recovery in its support.

Delaying until May, however, is likely to prove fatal. Poor trade figures supposedly lost Harold Wilson the 1970 election. Could surging inflation do the same for Gordon Brown in 2010?
 
An edited version of this article appeared in today's Daily Mail.