Cameron Becomes U.K. Prime Minister

Cameron Becomes Premier as Clegg Accepts Coalition

May 12 (Bloomberg) -- Conservative leader David Cameron struck a deal with Britain's No. 3 party to form the first coalition government since World War II, ending 13 years of Labour control.

"We have deep and pressing problems," Cameron said following his arrival at the prime minister's Downing Street residence 90 minutes after Gordon Brown's departure last night. "For those reasons, I aim to lead a proper and full coalition. That's the right way to provide this country with the strong and stable, good and decent government this country needs."

Cameron, 43, replaced Brown as prime minister after five days of unprecedented talks following elections May 6 that failed to produce a majority for the first time since 1974. His coalition partner, Nick Clegg, head of the Liberal Democrats, became deputy premier.

They'll propose 6 billion pounds ($9 billion) of cuts within 50 days to reduce a record budget deficit, raise the threshold to pay income tax, study a split between retail and investment banking and increase the Bank of England's oversight of the financial industry, Conservative officials said.

With 363 lawmakers in the 650-seat House of Commons, the two-party government may ease investor concern that last week's inconclusive vote would leave Britain with a leader too weak to fix U.K. finances. The pound and gilts rose yesterday after reports that Cameron was set to succeed Brown.

Sterling gained for a third day, rising 0.3 percent to $1.4993 at 8:55 a.m. The 10-year gilt yield fell 2 basis points to 3.86 percent.

'Market's Favorite'

"A Conservative-Liberal democrat coalition is the market's favorite outcome," said Philip Shaw, chief U.K. economist at Investec Plc in London.

U.K. government debt will rise to 77 percent of gross domestic product this year and may approach 100 percent by 2014, Standard & Poor's says. The rating company cut its outlook on the U.K.'s AAA grade from stable in May 2009, saying debt may rise to a level incompatible with its top assessment.

"We're going to form a new government and more important than anything else a new kind of government," Clegg told reporters after his party approved the deal early today. "I believe we are united in wishing to tackle the immense challenges this country faces and deliver a fairer future for Britain."

Cabinet Jobs

George Osborne, 38, will become the youngest chancellor of the exchequer in more than a 100 years, and the party's former leader, William Hague, will be foreign secretary; Liam Fox will be defense secretary. The cabinet will include four Liberal Democrats as well as Clegg, with Vince Cable overseeing banking or business or policy, BBC Radio said. The BBC also said Chris Huhne will be in charge of environment in the Cabinet.

With the deal struck, Cameron and Clegg, 43, each have to overcome skepticism over allying with a traditional antagonist. The Liberals haven't had a role in government since Winston Churchill led a unity Cabinet 65 years ago. Conservatives have been out of power since 1997.

"I would rather be in a minority government," Conservative lawmaker Graham Brady said. "Realistically, there's not much more prospect of whatever arrangement is reached lasting for very long."

"The odds are against it lasting four years," said Andrew Russell, a lecturer at Manchester University, and author of "Neither Left Nor Right," a history of the Liberal Democrats. "It's possible it could last a couple of years. A lot depends on personal chemistry."

Buckingham Palace

Standing outside his official residence in London, Brown announced his resignation and then travelled the mile to Buckingham Palace to tender his resignation to Queen Elizabeth II and recommend Cameron as his successor. She then summoned Cameron and asked him to form a government.

In the May 6 election, the Conservatives won 306 districts, a net gain of 97 from the previous election in 2005. Labour had a net loss of 91 seats to end with 258. The Liberal Democrats lost five seats and now have 57 members of Parliament.

The Conservatives and Liberal Democrats agreed to reconcile campaign differences over Cameron's proposals to cut spending and lower inheritance taxes and Clegg's bid to eliminate income taxes on those with the lowest incomes and loosen immigration rules.

There are also disagreements over policy toward the European Union. Clegg favors dropping the pound for the euro under the right circumstances, a stance opposed by Cameron. The parties agreed Britain wouldn't join the euro.

Sarkozy, Merkel

Clegg attacked the Conservative leader during an April 15 debate over his decision to pull his party out of an alliance in the European Parliament with French President Nicolas Sarkozy and German Chancellor Angela Merkel and join up with euro- skeptic east Europeans.

The Liberal Democrat called the Conservatives' new allies "a bunch of nutters, anti-Semites, people who deny climate change exists, homophobes."

U.S. President Barack Obama called Cameron to congratulate him and invite him to the U.S. later this year. Merkel also called Cameron last night.

At 43 years and seven months, Cameron is the youngest U.K. leader since 1812. Tony Blair was four days short of his 44th birthday when he took office in 1997.

Heathrow Runway

Cameron has infuriated some on his own side since he became Conservative leader at the end of 2005 with his efforts to reach out beyond traditional supporters. He put forward a pro-gay rights agenda and opposed building another runway at London's Heathrow Airport on environmental grounds.

Cameron and his wife Samantha divided their time between the North Kensington district of west London where they have their main home and the district he represents in Parliament, Witney, 70 miles (110 kilometers) west of London.

The couple has two young children and a baby due in September. Last year their first son, Ivan, who suffered from a rare genetic illness, died at the age of six.

Cameron is the kind of Conservative leader Britain hasn't seen in decades: someone from a wealthy background who went to Eton, Britain's most famous private school. His ancestors include King Henry VII, who ruled in the 15th century, and at least seven earls.

British politics has seen a backlash against politicians from upper-class families since the mid-20th century.

The last such Conservative leader was Alec Douglas-Home, a Scottish earl who in 1963 gave up the noble title he inherited from his father, and his seat in the unelected House of Lords, so he could gain election to the House of Commons and become prime minister. He lasted 12 months before losing to Labour's Harold Wilson in the October 1964 general election.

To contact the reporters on this story: Robert Hutton in London at rhutton1@bloomberg.net Thomas Penny in London at tpenny@bloomberg.net