Markets expect Clarke fireworks

DIANE COYLE

Economics Correspondent

Expectations are growing that Kenneth Clarke, Chancellor of the Exchequer, will deliver a dramatic Budget when he stands up in the House of Commons tomorrow, despite behind-the-scenes attempts last week to play down the size of tax cuts.

Nick Knight, a prominent City of London strategist at Japanese bank Nomura, said: "What would be the point of fudging what could be his last Budget? He will be bold one way or the other."

Financial markets firmly expect both tax cuts and a fall in interest rates in the weeks after the Budget.

This has already cut interest rates paid in the money markets, which led Halifax Building Society to reduce its rates on investment accounts on Friday - a move that usually precedes a drop in base rates.

Other City analysts warn, however, that the Chancellor faces the risk of a run on sterling if financial markets think he is giving away too much on taxes. The pound weakened sharply a fortnight ago after "authoritative reports" that tax cuts would amount to pounds 5bn. Sterling has recovered only in the past few days due to market perceptions that the Treasury was trying to scale back expectations.

Neil MacKinnon, chief economist at Citibank investment bank, said: "Tax cuts without spending cuts would not go down at all well."

The reaction by financial markets to the Budget is crucial. It will be the deciding factor in whether there is room for a fall in the 6.75 per cent base rate and in mortgage rates.

Bijal Shah, an economist at Smith New Court, said: "Lower mortgage rates are the best way to put money into people's pockets."

The market reaction is likely to be mixed, analysts said yesterday. David Owen at Kleinwort Benson said expectations about the scale of tax cuts had been building. "There is a lot of room for disappointment."

Corey Miller, a strategist at Societe Generale, said there was a high degree of optimism about the Budget, but it had already been priced into the stock market.

Kevin Darlington, at brokers Hoare Govett, said financial markets were likely to give the Chancellor the benefit of the doubt immediately after the Budget. "But over time they could regurgitate what they might swallow instantaneously."

Hopes for reductions in personal taxes that would come into effect next April range widely, from pounds 2bn-pounds 10bn with a cluster around pounds 3bn. Income tax reductions are firmly expected, with 1p off the basic rate seen as the most likely option. Mortgage lenders still hold out some hope for a package to stimulate the housing market - perhaps the abolition of stamp duty - despite recent City optimism about house prices.

Health and education will be shielded from the spending axe. This is likely to cut most heavily into capital expenditure, especially the roads and housing programmes. The Government is likely to announce a greatly expanded Private Finance Initiative to fill this gap.

Some pounds 3bn will be found from the normal reduction in the contingency reserve - funds set aside for unforeseen spending, which are always cut as the financial year to which they apply draws nearer. Other departmental spending plans, such as defence and trade and industry, will also be cut back to offset tax cuts.

There are fears in the City that the Chancellor could also announce tax increases to make the public finances add up in a way that will keep sterling out of danger. A higher insurance premium tax is seen as a frontrunner, while higher taxes on the privatised utilities cannot be ruled out.

Richard Kersley, equity strategist at BZW, said: "The market has focused on likely winners. People have not paid attention to the fact that a broadly neutral Budget would create as many losers as winners." He said that attention was likely to switch to the opinion polls and Labour Party policies as soon as this year's Budget was out of the way.

Gavyn Davies, page 19

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Life and Style
Living for the moment: Julianne Moore playing Alzheimer’s sufferer Alice
health
Voices
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle v United player ratings
Arts and Entertainment
books
Sport
Nemanja Matic holds the Capital One Cup with Branislav Ivanovic on Sunday
football
News
people
Life and Style
love + sex
Arts and Entertainment
Victoria Wood, Kayvan Novak, Alexa Chung, Chris Moyles
tvReview: No soggy bottoms, but plenty of other baking disasters on The Great Comic Relief Bake Off
ebooks
ebooksA special investigation by Andy McSmith
Extras
indybest
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
Arts and Entertainment
Seth Rogan is one of America’s most famous pot smokers
filmAmy Pascal resigned after her personal emails were leaked following a cyber-attack sparked by the actor's film The Interview
News
Benjamin Netanyahu and his cartoon bomb – the Israeli PM shows his ‘evidence’
people
Life and Style
A statue of the Flemish geographer Gerard Kremer, Geradus Mercator (1512 - 1594) which was unveiled at the Geographical Congree at Anvers. He was the first person to use the word atlas to describe a book of maps.
techThe 16th-century cartographer created the atlas
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
The Internet of Things: Meet the British salesman who gave real-world items a virtual life

Setting in motion the Internet of Things

British salesman Kevin Ashton gave real-world items a virtual life
Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

Election 2015: A dead heat between Mr Bean and Dick Dastardly!

Lord Ashcroft reveals latest polling – and which character voters associate with each leader
Audiences queue up for 'true stories told live' as cult competition The Moth goes global

Cult competition The Moth goes global

The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

Pakistani women come out fighting

Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
Leonora Carrington transcended her stolid background to become an avant garde star

Surreal deal: Leonora Carrington

The artist transcended her stolid background to become an avant garde star
LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

Education: LGBT History Month

Pupils have been discussing topics from Sappho to same-sex marriage
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

Cricket World Cup runs riot to make the event more hit than miss...

The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot