The City eyes changes in the budget

It was during New Labour’s first budget back in 1997 that Gordon Brown’s special advisers gathered around a Reuters terminal, fearful of the market reaction to the first Labour budget in two decades.

It barely registered a flicker, and that was seen as the great success of the “prawn sandwich” offensive on the City.

Well today in less than two hours the City, the markets, bond traders, and credit default swap market makers will be eyeing this speech with profound interest again.The chancellor is surfing a rather epic tidal wave of debt.

If he goes too fast he’ll collapse into the crest of credit ratings downgrades. If he slows up, he fears he’ll fall off his surfboard as the economy will lose a key support.

What to watch for:

• Economy: the downgrade to this year’s projections may tempt the Treasury to adjust upwards the already toppish strength of the rebound from 2011.
• Deficits: the record annual deficit this year will go up a bit. The real question is whether they will greatly decrease projected deficits in the following years following better-than-expected stock market, housing market and oil tax receipt assumptions. Could the chancellor even bring forward by a year the date when the structural budget deficit will be eliminated to 2017 rather than 2018?
• Debt interest: £67bn plus spent on servicing debt by 2013, around double what we spend on defence.
• Spending: remember that leaked Treasury documents from September already implied a 2.9 per cent real terms cut in departmental spending from 2011/12. The Treasury have not confirmed this number so far. Protection of priority budgets such as schools, hospitals and police, will be difficult to quantify. No government departments will actually be protected. Expect policies designed to make difficult the Conservative pledge to protect the Department of Health budget.
• Banks: good news, a considerable downgrade to the likely cost of financial sector rescue packages
• Bonuses: a cunning legal attack on the decision of banks to pay bonuses (above around £20,000). It is aimed at changing that decision-making, rather than raising significant sums of money.

Follow me on twitter.com/faisalislam for a live reaction to the speech from 1230.