A Very British Budget

March 21, 2012

Today we get the what could possibly be the most pre-spun British budget ever, though don’t rule out the traditional “rabbit from the hat” surprise so beloved of British finance ministers.

The important stuff for the markets is that with ratings agencies still threatening to rob Britain of its AAA status, it will be pretty much fiscally neutral – i.e. no serious economic stimulus on offer – borrowing will have come in  a little lower than expected this year and the government’s independent forecasting body will predict the economy will eke out just enough growth this year to avoid a new recession.

In other words, don’t expect much market reaction, though the fact the slightly lower borrowing may allow slightly lower debt issuance in the coming year could give gilts a small fillip.

With precious little in the coffers this will be a deeply political budget, balancing the twin needs of a centre-right/centre-left coalition, despite U.S. Treasury Secretary Geithner’s warning this week about the futility of austerity for austerity’s sake.

So what does a chancellor of the exchequer do with little or nothing to spend?
In economic terms, he tinkers. That is not to say that tinkering might not be politically explosive.

We’re told George Osborne will cut the 50 percent top rate of income tax, although maybe not immediately, balancing that by lifting more poor people out of the tax net altogether, slapping a higher purchase tax on houses worth more than 2 million pounds and pledging to crack down on the wealthy who avoid tax. Will the latter measures be enough to neuter the accusation that the Conservative party – the dominant one in the government – is not merely helping out its core constituency? I’d be amazed if that isn’t the tack taken by the opposition Labour party and even by some Liberal Democrats, the minority coalition partners.

Osborne’s gamble is presumably that with Labour not making much headway with its argument that austerity is wrecking the economy, now is the time to make bold decisions on tax which will delight his party’s base. The LibDems, already eviscerated in the polls, are probably in the most uncomfortable position; in a government cutting taxes at the top end, something many of their supporters will despair of. They’ll put a brave face on it. The last thing they need is to collapse the coalition and force an early election at which they could be all but wiped out in parliamentary terms.

Before the event, we get latest public finance figures and the minutes of the Bank of England’s last policy meeting. Any hopes for stimulus still rest squarely with the central bank where it appears there is a receding chance that more money will be printed. With UK government bond yields starting to head up from record lows and the bulk of the government’s cuts programme yet to bear down, 2012 looks anything but a straightforward year.

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