March 19, 2010 / 2:38 PM / 9 years ago

PREVIEW-Labour to plot steady course in pre-poll UK budget

* Borrowing looks set to undershoot ultra-bleak forecast

* Growth seen broadly in line with December estimate

* Labour hoping to sustain pre-election popularity bounce * No revelation expected for deficit reduction sceptics

By Matt Falloon

LONDON, March 19 (Reuters) - Britain’s budget next week will offer some small gestures to aid recovery but, weeks from an election, the Labour government will not risk the wrath of debt-wary taxpayers and financial markets with any firecrackers.

While borrowing looks set to come in lower than feared, the government’s overall forecasts are likely to stay broadly the same as December and finance minister Alistair Darling will re-emphasise his plans to halve a record budget deficit by 2014.

Mindful that the deficit is currently 12 percent of gross domestic product — comparable to crisis-hit Greece — Darling has said this will not be a “Christmas tree” budget.

Next year, the government may still need to issue something in the region of 190 billion pounds ($289 billion) of gilts, after this year’s record 225 billion pounds and perhaps without the support of any more asset purchases by the Bank of England.

A British election is expected on May 6 and Labour, once almost certain for the chop after 13 years in power, has clawed its way back into the contest with the opposition Conservatives.

The parliamentary election could go either way or even end up with no one party in charge — a result which could spook markets and may hamper efforts to cut Britain’s huge debts.

Credit rating agencies say they are more focused on what happens in May than next week, but the March 24 budget is one of Labour’s last sure fire front-page stories before polling day and the party can’t afford to get the message wrong.

One government source said the budget is unlikely to set the world alight and any dazzling moves were probably off the menu.

“I don’t think expectations are too high,” the source said. “I think people are in the right place.”

SOME RELATIVELY GOOD NEWS

Fortunately for Labour, there will be a few things to cheer.

Borrowing is likely to undershoot December’s forecast by as much as 10 billion pounds, the populist tax on bank bonuses will yield much more than estimated [ID:nLDE6240NO] and unemployment has risen by less than feared and by less than in other recessions.

That should be a cause for a big celebration, but these are not ordinary times. In December, Darling saw borrowing for this year at an eye-watering 178 billion pounds ($270 billion).

“Such a revision would not change the overall picture — the UK would still be facing record levels of borrowing, and the public debt ratio will still be on a rising trend for the whole of the forecast period,” said Simon Hayes, a Barclays economist.

There will be some cash — maybe a few billion pounds — to spend on targeted areas such as the labour market and green industry, but Darling will want to bank the rest while he can.

There is no guarantee that a lower borrowing profile this year will mean future years will follow a similar path.

Darling is expected to stick broadly to December’s 1-1.5 percent 2010 growth estimate with stronger growth beyond that.

Analysts say previous estimates of around 3 percent growth to come are optimistic but Darling has the backing of similar Bank of England forecasts to support his view.

Labour’s improving opinion poll ratings indicate that its message of putting growth first has gone down well with a British public still reeling from an 18-month recession while the Conservatives have prioritised harder deficit cuts.

“We expect it (Labour) to stick to its strategy of committing to narrow the budget deficit, but not at the expense of choking off the recovery,” said BNP Paribas economist Alan Clarke.

Opposition aides admit they have sometimes struggled to sell their message but remain convinced Labour’s policies risk driving up borrowing costs and hurting future prosperity.

A Conservative source told Reuters this week the party would give more details of its spending plans after the budget.

So far there has been little to go on.

Markets, once expecting a Conservative government, had been pricing in the opposition’s tougher deficit talk but are now having to look seriously again at what Labour is doing.

Satisfying both voters and market sceptics next week looks like a tough ask. Of the two, taxpayers — who rescued the financial sector with billions of pounds — probably win out.

“It is unlikely that any significant decisions on spending will be taken until after the election and there is thus a concern that the markets will react negatively to any plans put forward next week,” said Peter Dixon, a Commerzbank economist.

(Editing by Ruth Pitchford)

UK Economics desk, uk.economics@reuters.com, +44 207 542 1894 $1=.6580 Pound

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below