The Chancellor is expected to confirm that the public sector borrowing requirement (PSBR) is falling sharply and that the government is forecast to become a net repayer of debt in the 1999-2000 tax year. This would lie towards the optimistic end of forecasts made by the Chancellor in his November pre-budget report.
Simon Briscoe, of Nikko Europe, said that although forecasts of a surplus in public finances in 1999 to 2000 could improve market sentiment, "there is a deeply held cynicism in the City about `year-plus-one' forecasts". However, Mr Briscoe added that if the Chancellor were to forecast a surplus for the coming tax year "that would be deeply interesting".
The main impact of a surplus in the tax year 1998 to 1999 would be on market sentiment, according to Mr Briscoe, who said: "It would greatly increase the feelgood factor".
He added that better-than-expected public finances could also lift the bond and the equity markets. If the PSBR is less than forecast, this reduces the value of bonds that the Government is forced to issue. This fall in supply would push up their price. And a rise in the bond markets of this type would also lift the stock market.
However, he warned that any movements in the markets would probably be limited. Any likely change in the level of bond issuance is small compared to the large stock of bonds currently in circulation.
Michael Hughes, of Barclays Capital, agreed the market impact of the better-than-expected news about the PSBR would most probably be "marginal", at least in the short term and stressed the City would be more concerned with how the Chancellor intended to spend any spare cash.
According to Mr Hughes, the Chancellor could use any surplus in the public finances in two ways. He could build a war chest to finance increases in spending or cuts in taxes or he could also try to move the UK economy towards being a sustained repayer of debt. If the Chancellor signals he is at least as concerned about the latter objective than the former, this could prompt a favourable reaction from the City.
Mr Hughes believes the Chancellor needs to become a net repayer of debt and to reduce the sensitivity of the economy to fluctuations in short term interest rates if the UK is to participate successfully in EMU. Last week, the Office of National Statistics revised its estimate of fourth quarter GDP upwards by 0.2 per cent. Buoyant economic growth helps the PSBR as it increases the total amount of tax revenues received by the Treasury.
Last month, it was announced that the Government made the highest-ever monthly repayment of the national debt in January. The surplus of revenues over spending amounted to pounds 10.4bn.