The initial market reaction to the PBR was muted but my concern is that on further reflection the report will be damaging to the market’s view of the UK’s ability to service its forecast debt mountain.
The Chancellor is principally relying on massive public spending cuts to halve the debt burden over the next four years.
However, apart from relatively trivial detail on outsourcing prisons, cutting the legal aid bill and restricting the cost of residential care, there is no real detail on where these cuts are coming from. Indeed, there was more on increases in spending in the immediate future.
Overall public spending is set to increase by an average of 0.8 per cent over the next four years but, having taken acc-ount of the planned increases ann-ounced in the PBR and the increasing public interest burden, this means real and savage cuts, of which we and the departments concerned have no knowledge.
The long-term health of the economy is almost totally dependent on the financial services industry in its broader sense. Already there is a big brain drain in the banking sector fuelled by the increases in tax.
My suspicion is that once the analysts start looking hard at the plans as they are announced, the numbers will yet again lack credibility.
This will lead to a weakening of sterling and increase the already high risk of a downgrading of UK public debt by rating agencies.
Of course, if that happens it will put upward pressure on interest rates which will significantly damage the chances of recovery.
There has been a lack of credibility in the Chancellor’s forecasts up to now and so the fact that his projections on borrowing requirements are only a little worse than in the Budget does not warrant much confidence. Neither does his prediction that we will return to growth this quarter.
This hardly accords with recent announcements by the CBI and the British Retail Consortium, let alone his own data showing no growth in October compared with September.
So there is a real risk that in January we will still be in recession and this could be the trigger for a further downward move in international sentiment on the UK economy.
This pre-Budget report is highly political but it may well backfire both politically and financially.
This will only accelerate with the bonus levy and will concern all bankers that this country under this Government is not a safe place to operate.
Batten down the hatches – we are in for a rough ride.