Darling’s “lame-duck” budget

March 23, 2010

Mark Bolsom- Mark Bolsom is the Head of the UK Trading Desk at Travelex, the world’s largest non-bank FX payments specialistThe opinions expressed are his own. He will participate in a Reuters Budget live blog at noon GMT on Wednesday, March 24, 2010. Please tune in and join the discussion. -

While the UK’s financial media has billed the 2010 budget as Chancellor Alistair Darling’s most important – due to their assumption it will be his last – it seems that the financial markets have taken a more relaxed view, feeling its importance has been somewhat overstated by the media.

While most economists have branded this budget a ‘lame-duck’, the media’s huge sense of anticipation will leave them largely disappointed with what, I feel, will be a very neutral and vague budget.

The most interesting aspect of the 2010 budget will be how well the Chancellor balances the market’s demands for caution with the voters thirst for political sweeteners.

Fiscal tightening is sure to be on the agenda, for example, but it is extremely doubtful that Darling will delve into too much practical detail, as Labour remains reluctant to share exactly how they plan to halve our budget deficit in four years.

It will also be interesting to see whether Darling alters his growth forecasts. At the moment, I would strongly challenge the fiscal reality of the current growth forecasts and hope they are revised downwards. With our disappointing and sluggish recovery, a predicted growth of 1.25 percent for 2010 and 3.5 percent for 2011 is both bullish and unrealistic.

These forecasts are based on the idea that consumers will regain a strong enthusiasm for spending this year – as we’ve seen however, with poor retail figures and rising inflation, this is far from the case, and individuals continue to remain economically wary.

Once Darling has delivered the budget, attention will swing to the financial markets’ reaction. With a widely expected neutral budget, much will be priced into the markets already. For a strong and positive reaction from the pound, we’ll need to see Darling to tackle the deficit in real detail – something no-one expects to happen.

Certainly, whatever is in Darling’s budget this year, it is doubtful the markets will set too much of a store by it. They know nothing will be enacted or our credit rating downgraded before the election – to do either would be seen as too much of a political move.

Until May, the markets will continue to play a waiting game; treading water until the days after the election, when the new budget will be delivered. We’re expecting an emergency budget to be called in the 50 days after the general election – so perhaps mid July. And in the minds of the financial markets, this post-election budget will be the real agenda-setting piece of 2010.

What are your thoughts?
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