Markets expect Clarke fireworks


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
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Day In a Page

John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
Football Beyond Borders: Even the most distruptive pupils score at homework club

Education: Football Beyond Borders

Add football to an after-school homework club, and even the naughtiest boys can score
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

Nick Bollettieri's Wimbledon Files

Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

‘This is one of the best McLaren teams ever – we are going to do it’

Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most