STERLING has strengthened further on currency markets in a positive City response to the Chancellor, Mr Kenneth Clarke's cautious annual budget package involving barely £1 billion net tax reductions.
But although the British currency firmed almost one pfennig to a new post three-year of 2.5523 deutschmarks, currency analysts believe sterling should now move into a consolidation phase.
As a result of sterling's strength yesterday, the pound continued to climb against the mark and to soar away at the top of the ERM band. The Irish currency closed at DM2.5550 from DM2.5435 a day earlier. At the same time it remained broadly static against sterling at 100.15p from 100.08p on Monday.
Upward pressure on sterling may well be lessened by Mr Clarke's limited fiscal changes aimed at underpinning the recovery in the "feel-good factor" among consumers without the risk of being forced into lifting British interest rates before the general election.
Most of Mr Clarke's projections were in line with City expectations. Economic growth is forecast to accelerate, mainly due to the developing consumer spending boom, predicted to hit 4 per cent next year, financed by cheap credit. But the City was agreeably surprised by his forecasts of a decline in the Public Sector Borrowing Requirement (PSBR) within the context of budget involving modest net tax cuts.
The current year's PSBR is now expected to be £26.5 million, down nearly £3 billion compared with the Treasury's revised forecast in summer, and next year's PSBR is forecast to decline again to £19 billion.
The goal remains a balanced budget in 1999-2000. But the City's positive response may not survive detailed analysis of the budget measures. In particular, there must be doubt whether next year's PSBR will decline to anywhere near £19 billion. This would leave Mr Clarke, or his successor as Chancellor after the election, with the need for higher taxes in the next budget in a year's time.
Estimates made by the Inland Revenue and by Customs and Excise put the cost of VAT loopholes at as much as £7 billion. Mr Clarke announced a draft of measures and the recruitment of an extra 2,000 tax collectors to plug the loopholes. This represents the most concerted assault to date on the prosperous and growing "cash economy".
