David Prosser: Darling's impossible dilemma

Outlook Will Alistair Darling live to regret his determination to put the question of tackling the budget deficit on the back burner until he is convinced the UK economy is firmly in recovery mode? The Chancellor let it be known at the weekend that he would rather get it in the neck for pulling support from the economy too late than for pulling it too early. But he would not be human had yesterday's news from the credit ratings agencies not given him pause for thought.

Financial markets across Europe were spooked by Fitch's decision to cut its rating of Greece. The downgrade is a timely reminder of how little faith international debt markets have in governments' ability to repay the mammoth borrowing they are racking up as they try to pull their economies out of the downturn.

More worrying for Alistair Darling was a warning from Moody's that the UK's much cherished – and, if debt repayments are to remain affordable, much needed – AAA rating is in jeopardy unless Mr Darling can convince the markets that he has a credible plan for getting on top of the budget deficit.

The Fiscal Responsibility Act, which the chancellor will publish today, imposes a legal requirement on the Treasury to halve the deficit by 2014-15. But will it count as a credible plan? Probably not, unless it is accompanied by a clear timetable explaining how Mr Darling plans to comply with his own laws.

Naturally, the Chancellor has already begun planning for deficit reduction. For example, despite all the talk of not withdrawing the fiscal stimulus too soon, we know that the temporary VAT cut will come to an end on New Year's Day, while the car scrappage scheme will run for just a few months longer. We know too that come next April, higher earners will face tax increases. There may be more of that to come today.

The picture on public spending is much less clear, however, even though cuts will be a bigger part of the deficit reduction programme than tax rises. Though Gordon Brown and his Chancellor have often talked of tough choices, we have so far been offered almost no details of who the losers will be. What is certain is that the latest efficiency savings – a hypothetical spending cut with which this Government has fallen in love – is not going to convince anyone that public finances are on their way back to health.

Today's challenge is clear. Mr Darling must convince lenders to the UK that they do not need to worry about our ability to repay their money. At the same time he must ensure he does not choke off the economic recovery that we assume – though do not know for sure – has finally begun. Then there's the small matter of positioning Labour for the election. Should be a breeze.