Markets greet Brown package with caution

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London markets reacted cautiously to the Chancellor's public spending statement today as analysts remained undecided as to its implication for sterling and shares.

London markets reacted cautiously to the Chancellor's public spending statement today as analysts remained undecided as to its implication for sterling and shares.

On the foreign exchange markets the pound was virtually unchanged against both the US dollar and the euro following the £43 billion public spending statement.

But the stock market lost some ground as worries over the inflationary impact of the extra money being pumped into the economy shook confidence.

By the end of today's session the FTSE-100 Index of leading UK companies was down 75 points at 6450.5.

Despite the dip in the value of blue chip stocks, analysts were split over the consequences of today's announcement.

Tamiko Bayliss, currency economist at Commerzbank, said: "I really do not believe investing in health, education and transport will lead to inflation, if anything it will lead to increased productivity.

But Jeremy Hawkins, senior economist at Bank of America, said the extra spending could have more ambiguous consequences for the UK.

He added: "Its a bit of a double-edged sword for the markets really.

"On the one hand there is a risk it could lead to higher borrowing costs, but on the other hand it could support growth and should be good news for the economy."

Marian Bell, an economist at RBS Financial Markets, said: "The market is a bit nervous but we have known the big numbers for a long time.

"I do not think it is clear what it will do to interest rates because the Bank of England's Monetary Policy Committee, which sets UK rates, was briefed before their last meeting and decided to leave rates unchanged then."

But she added: "There could be some risk to the economy if the Chancellor is too optimistic in his forecasts."

The Corporation of London welcomed today's announcement from the Chancellor.

Judith Mayhew, chairman of policy at the corporation, said: "I am delighted that the Government has recognised the crucial part which good public transport plays in continuing to bring economic success.

"A 20% a year real increase in transport spending is most welcome."

Unions warmly welcomed the extra spending on public service while business leaders said it was time for the Government to "deliver the goods".

Rodney Bickerstaffe, general secretary of Unison, said: "This comes like rain at the end of a long drought. Much still needs to be done to mend the damage to public services caused by the last Government's 18 years neglect and hostility and the first two years standstill of the Labour Government."

TUC general secretary John Monks said: "This is all eminently affordable and should pose no threat to inflation or interest rates."

Digby Jones, director general of the Confederation of British Industry, said: "Although business will have reservations about a level of public spending above 40% of GDP, we are pleased at the Chancellor's determination to attack the under-investment of the past.

"The challenge will now be to ensure that the funds allocated today are spent wisely and targeted where they can be most effective."

Ruth Lea, head of policy at the Institute of Directors, said: "Today's huge increases are only affordable because of the large increases in the tax burden since 1997. Moreover, there is no guarantee that the cash injections will deliver the goods."

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