Markets unlikely to forgive change of course by Osborne


LAST March, chancellor George Osborne stood up at the despatch box to deliver what was widely considered to be his most important budget ahead of the next General Election. Boy did he make a mess of it. Pasty taxes and granny taxes were all that dominated the headlines, and Labour dined out on the mess.

For many, Osborne seems to do little other than put his foot in it, time after time. So if there was ever an opportunity to surprise the press, and more importantly the electorate, and to improve the Conservative party’s chances of an outright majority in two years time, it’s next Wednesday.

By now, voters have got the message that Osborne isn’t for changing course. Plan B isn’t an option. And if the electorate hasn’t heard this loud and clear, the markets certainly have. A change of direction would show political weakness, and yet another U-turn by an indecisive government.

But more worrying than the political risk is that a change of course could mean the financial markets start to take an even dimmer view of the UK’s fiscal situation. The little slap on the wrist they’ve given Britain since we lost our triple A credit rating from Moody’s would seem like nothing by comparison.

The borrowing costs on Britain’s 10-year government bonds have risen from 1.5 per cent last summer to around 2 per cent today, after months of speculation that the downgrade was coming. In a classic case of buy the rumour, sell the fact, gilt yields spiked after the initial decision by Moody’s to around 2.2 per cent, but have since come back to below 2 per cent. For now, the financial markets continue to give Osborne the benefit of the doubt. With the markets on his side and UK borrowing costs not spiking out of control, there’s a bit of wriggle room for the chancellor next week.

Many UK companies are sitting on cash ready to invest, but there still remain too many restrictions on them being willing or able to do so. Reforms to planning regulation, for example, remain painfully slow. The construction industry has been crying out for liberalising changes, and planning reform would also be welcome for businesses that wish to build new factories and warehouses to expand. Those exporters looking to take advantage of a devaluing currency are being held up by this lack of supply-side reform, and are still waiting to invest.

It’s time to stop the taxes and bring on the deregulation. Make it easier to invest, expand, hire people and consumer spending, accompanied by growth, will follow. That’s the best way to reduce the deficit. We will no doubt see the usual leaks, and will have a good idea of what to expect from the Budget in the days ahead, but Osborne is bound to hold back some sort of surprise. All chancellors like to have something to pull out of their hat. Let’s just hope that, for the sake of the UK economy, what is supposed to be a nice fluffy white rabbit doesn’t turn out to be the “foul, cruel and bad tempered rodent” killer rabbit from Monty Python’s Holy Grail.

Angus Campbell is head of market Analysis at Capital Spreads. You can follow him on Twitter @AngusCapSpreads

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