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
Property
pets
Arts and Entertainment
tvGame of Thrones season 5 ep 4, review - WARNING: contains major spoiliers!
Arts and Entertainment
tvThe C-Word, TV review
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Sport
Danny Jones was in the Wales squad for the 2013 World Cup
rugby leagueKeighley Cougars half-back was taken off after just four minutes
Life and Style
The original ZX Spectrum was simple to plug into your TV and get playing on
techThirty years on, the ZX Spectrum is back, after a fashion
News
Tiger Woods and Lindsey Vonn are breaking up after nearly three years together
peopleFormer couple announce separation in posts on their websites
Sport
football
Life and Style
Google celebrates Bartolomeo Cristofori's 360th birthday
techGoogle Doodle to the rescue
Arts and Entertainment
Haunted looks: Matthew Macfadyen and Timothy Spall star in ‘The Enfield Haunting’
tvThe Enfield Haunting, TV review
News
news
News
The Mattehorn stands reflected in Leisee lake near Sunnegga station on June 30, 2013 near Zermatt, Switzerland
news
ebooks
ebooksA celebration of British elections
  • Get to the point
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

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living