Square Mile unimpressed by Budget

By SIMON DUKE FOR MAILONLINE
Updated: 18:25 EST, 24 March 2010

A budget for builders but not for gilts. A little jam today, bills arriving later.

That was the early verdict from the City on what may be Alistair Darling's last fiscal package.

Though housebuilders celebrated the lifting of the stamp duty threshold, the London stock market shrugged off the Budget, with the FTSE 100 index finishing the day 4.3 points higher at 5677.9, having been lower before the Budget speech on worries about Greece.

Government securities (gilts) weakened slightly with the ten-year yield rising to 3.99pc. Sterling fell about one cent to $1.4880 against the greenback and also weakened against the euro.

The key worry in City minds is whether a borrowing crisis has only been postponed, rather than averted

The Chancellor could count the lack of reaction as a small victory, since the continuing huge scale of public borrowing could have spooked markets badly. He avoided that trap with a package that was broadly neutral in revenue impact.

The key worry in City minds is whether a borrowing crisis has only been postponed, rather than averted.

The 2009-10 deficit may have shrunk from £178bn to £167bn but remains the largest in the Group of 20 nations.

The Treasury still needs to raise a mountainous £187.3bn by issuing gilt-edged stocks in the coming year, of which £90.3bn will come from medium and long-term gilts.

The amounts have been spread carefully over the various types of gilt to help raise the funds. But gilt experts expect the cost of funding to rise, with long-term yields increasing from about 4pc to nearer 5pc a year ahead.

Gilts were relatively calm yesterday because the scale of borrowing needs has been obvious for some time, though Deutsche Bank's chief economist George Buckley described the £187bn total as 'more than we thought'.

Future funding needs may be greater if the economy grows more slowly than the Treasury's very bullish forecast, which though trimmed to between 3 and 3.5pc for 2011, remains at 3.25pc to 3.75pc for later years.

Analysts cannot see how such rapid growth will happen when consumers and the public sector face a serious squeeze.

Some analysts see sterling falling to $1.40, and are reminded of the 1976 crisis when the International Monetary Fund stepped in. With a General Election only weeks away, market analysts regard the Budget to some extent as a 'phoney war'.

Ian Williams, strategist at Altium Securities, said: 'It might all be irrelevant in six weeks'.