Budget 1999: City Reaction - Plaudits for the handout that wasn't
Wednesday 10 March 1999
Stephen Bell, chief economist at Deutsche Bank, said: "We are used to chancellors and finance ministers standing up and pretending to be prudent when they are being profligate. Gordon Brown has done the opposite and succeeded in appearing to be profligate when he is not."
He pointed out that, of the pounds 4bn being given away in tax cuts, the vast majority is being clawed back elsewhere.
The real giveaway does not kick in until 2001 - the probable year of the next general election.
The headline figures showed pounds 1bn being injected into the economy in 1999, with a further pounds 1.4bn next year.
The City had generally expected this year's budget to be neutral or mildly expansionist overall and by all accounts that was what it got.
"It was a very good presentation," Mr Bell said, adding: "None of the cheap wisecracks, a clever use of quotations from the Opposition, and then coming back after he had apparently dealt with income tax with the 1p cut next year. It was the performance of a man who feels on top of his job."
The Chancellor's attempts to appear both generous and prudent at the same time did cause some initial confusion in the City.
While the stock market rose, the gilts market saw some selling.
The FTSE 100 index closed up 28.9 points at 6,237.7, although, with the Chancellor still on his feet at 4.30pm, when the stock market closed, the full reaction will not be seen until share trading resumes today.
City observers said that the tax cuts, particularly for the lower-paid and middle-income families, would help to get reticent shoppers back into spending mood - good news for the hard-pressed retail sector and for consumer goods companies generally.
However, the water companies and BAA, the airports operator, saw their shares fall following the announcement that the new, tougher Office of Fair Trading is to investigate charges in those industries.
Mike Grimble, economist at Norwich Union, the insurance group, said: "It looks as though he has found a way to put a bit more into the economy, which is what you need - and there is a longer-term feel to it, too.
"There is enough in this to keep the economy ticking over. More money in the back pocket will help consumer confidence."
The supply-side measures were also seen as helpful, particularly the Chancellor's efforts to remove distortions in the tax and benefit system which discourage people from seeking work. The doubts centred mainly on Mr Brown's decision to stick by his earlier forecasts of 1-1.5 per cent growth this year accelerating to 2.25-2.75 per cent in 2000, which are still more optimistic than City consensus.
The Chancellor's apparent largess also raised concern that the Bank of England may be less inclined to cut rates further as a result.
Some in the City would have liked the Chancellor to have been salting away more at this stage in case unemployment, which is currently at levels much lower than anyone expected at this stage, were to rise sharply again.
A big worry is the United States economy, which is still growing far faster than anyone expected but could easily turn down at any time.
At BT.Alex.Brown, Bob Semple said: "These are quite perky growth forecasts. There may be some concern that if things are worse than expected public finances could end up in a tangle."
However, Paul Turnball at Merrill Lynch argued that the Chancellor may not be sticking his neck out as much as many in the City think, even if interest rates do not come down by much from now on.
"We have growing evidence that the economy is recovering," he said, pointing out that most of the measures in the Budget were supply-side measures intended to improve long-term productivity. "Overall the budget should underpin the improving prospects for the economy," he said.
Many of the measures - particularly the introduction of the 10p rate of tax and the abolition of mortgage interest rate relief - had been well trailed.
The City had expected various tax allowances to encourage innovation and research spending, and for small business, although the across-the- board cut in both corporation tax and income tax came as a surprise.
There was relief too that that the Government had recognised the need to ensure that the new energy tax did not add to the overall burden of corporate taxation.
Robin Aspinall, at National Australia Bank, said: "It is difficult to point to anything which is going to hurt the economy. The equity market likes a bit of live-now-pay-later. There is just a hint of the (Oskar) Lafontaine [Germany's Finance Minister] - it is our duty to support growth; a bit pinkish."
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