SHARES in London raced ahead yesterday amid speculation in the City that growing economic strength will force Mr Kenneth Clarke, the British Chancellor of the Exchequer, to deliver a prudent Budget on Tuesday.
The FT SE 100 index rose 64.9 points to 4,018.7 after a sudden burst of buying that caught traders by surprise and added to the upward pressure on prices.
Most traders had assumed the markets would be quiet until the budget.
The Chancellor will spend the weekend in his Nottinghamshire constituency, mulling over the final details of his package. He will be acutely conscious of City fears that big tax cuts would add to already buoyant economic growth, risking a build up of inflationary pressures and a further rise in interest rates.
While the City would welcome a cautious budget, the Chancellor is under pressure from Conservative party colleagues to deliver vote winning measures. But economists have warned that if tax cuts are followed by sharp interest rate rises, the electoral benefits would be minimal.
Industrialists are warning that a lax budget, which intensifies speculation about higher rates, could strengthen sterling's recent rally. The pound this week touched a four year high, sparking an outcry among business leaders that this could damage Britain's competitiveness and halt industry's tentative recovery.
Ms Kate Barker, chief economist of the Confederation of British Industry and one of the Treasury's independent advisers, said yesterday: "Manufacturing industry is concerned about a rising pound and we would like to see a budget which reassures the financial markets."
The budget coincides with signs of a more healthy broad based expansion in the economy. This is being led by strong consumer spending but a recovery in industry after mild recession last winter is also starting to take root.
Consumer confidence has been boosted over the past year by large falls in unemployment, lower interest rates, rising personal incomes due in part to tax cuts in last November's budget, and a steady rise in house prices.
This has translated into a strong expansion in spending on services and the fastest growth in retail sales since the boom years of the late 1980s.
But while inflationary pressures in industry are subdued, the vigorous consumer pick up has triggered an increase in inflation on the high street, prompting calls from the Bank of England for an interest rate rise from the present 6 per cent.
However, strong economic growth has brought an unexpectedly large rise in tax receipts, which last month led to a sharp fall in public borrowing. Mr Clarke now looks more likely to meet his forecast of a £27 billion public sector borrowing requirement this year.
The improvement in the PSBR has fuelled speculation that, in spite of most economists' arguments to the contrary, Mr Clarke may bow to political pressures and make large tax cuts.
