British Budget Didn’t Wow Markets

March 24, 2010

Government budgets are always pitched to two often-conflicting audiences, the public and investors.  When elections are near, pleasing both groups takes on even greater delicacy.  British elections will probably be held seven weeks from tomorrow, and U.K. public finances are in shambles in the wake of  and 8% drop in nominal GDP since 2007 and overly expansive policies earlier last decade when the economy was growing well.

Concern about Britain’s double-digit deficit-to-GDP ratio had weighed on sterling and is a factor behind its comparatively elevated gilt yields.  At 15:00 GMT, sterling was 0.4% weaker against the euro and dollar from quotes before Chancellor of the Exchequer began delivering the budget.  Ten-year gilt yields are two basis points higher and four basis points above yesterday’s closing level.  The Ftse had flipped from being down 0.2% on the day to being up 0.2%.  Reaction has been mild, but Darling needed a big score.

Darling’s modifications compared to the December 9th Pre-Budget Report (PBR) are fairly trivial, as analysts anticipated they would be.  He’s sticking with a growth forecast of 1-1.5%, which seems credible, but barely reduced projected growth in the out-years.  A forecast range of 3-3.5% in 2011 is down just a quarter percentage point and still looks far too optimistic.  Inflation is projected to retreat to its 2.0% mandated target by January 2011.  Real government spending growth of 2.2% next fiscal year was not adjusted.

The projected budget deficits were nonetheless revised down in part because those foreseen in the PBR may have been deliberately overstated.  For instance, the small net intake from the surtax on banker bonuses envisaged in the PBR never seemed realistic.  Over the coming four years, the cumulative deficit of Gbp 571 billion is 6.5% less than assumed in the PBR, but they leave a troubling trail of deficit-to-GDP ratios of 11.8% this financial year, 11.1% next, 8.5% in FY11/12, 6.8% in FY12/13, 5.2% in FY13/14 and 4.0% in FY14/15.  In that span, debt as a share of GDP would swell 39% from 54% to 75%.  Darling projects fiscal austerity after FY10/11 but doesn’t really flesh out what programs will be cut hardest.  The table below compares the new projected deficits with those in the PBR.

Gbp Bn 09/10 10/11 11/12 12/13 13/14 14/15
PBR 178 176 140 117 96  
Today 167 163 131 110 89 74


Today’s budget is more cautious than bold.  It’s not a manifesto to snatch an election victory from the jaws of defeat but rather one intended to make the Conservatives work for their win and to limit the size of their mandate, thus enhancing Labour’s ability to influence policy as an opposition party.  And who knows?  David Cameron might run a gaffe-prone campaign that turns the tide.  Number 10 Downing Street is now his to lose, not PM Brown’s to win.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.