STERLING FELL sharply yesterday morning on fears that Britain’s public finances were worse than expected as the new coalition government said it had found “various skeletons in cupboards” and accused the previous Labour government of “fixing” the fiscal forecasts.
George Osborne, the Conservative chancellor of the exchequer, said he would hold an emergency budget on June 22nd. He also announced the setting up of a budgetary watchdog to provide independent economic and borrowing forecasts for the government.
However his comments in a Financial Times interview about the “irresponsibility” of the previous government had echoes of the fiscal alchemy of which Greece was accused and spooked the markets. Their reaction highlighted the tension facing the government between the politics of blaming its predecessors for Britain’s fiscal problems and the turmoil in financial markets that this risks.
Labour politicians have done themselves no favours, though, it emerged yesterday, when David Laws, the Liberal Democrat chief secretary to the Treasury, revealed that Liam Byrne, his predecessor, had left him a letter. It read: “Dear chief secretary, I’m afraid there is no money. Kind regards – and good luck! Liam.”
The pound slumped by 1.9 per cent against the dollar to reach a 14-month low of $1.4249, before closing at $1.4408.
Gilts also took a hit on fears the government would have to issue more debt than originally thought in order to fund its deficit.
The yields on 10-year benchmark notes were higher by six basis points to 3.79 per cent at one stage, before closing at 3.73 per cent.
“Until we know how bad ‘bad’ is the markets will remain nervous,” said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ.
However, economists welcomed the establishment of the office for budget responsibility, the new watchdog which has the power to set government economic and borrowing forecasts.
Michael Saunders of Citigroup said: “This can’t be a substitute for action [on the deficit] but it is a very important long-term step.”
Jonathan Loynes of Capital Economics said it was likely the office would provide weaker forecasts for growth and the public finances before the emergency budget in June, which would “point to the need for additional tax increases building up to about £50 billion per annum to bring borrowing down in line with the new government’s plans”. – Copyright The Financial Times Limited 2010
