The unveiling of a new budget helped the Pound to stem overnight losses as it rallied in early NY trading. Spending cuts and tax increases will total £40 billion ($59 billion) a year by 2015, which would eliminate the country's structural deficit. That is the spending that is not tied to cyclical factors. Net debt should peak at 70% of GDP by 2014. The news sent gilts (UK government bonds) higher as the yield on two-year gilts fell 10 basis points to 0.76%. That means the government will be able to borrow at la lower rate. The new budget should help the UK to keep its AAA rating.
Chancellor of the Exchequer New Treasury Secretary George Osborne said total borrowing would fall from £149 billion this year to £37 billion in fiscal 2015, and that borrowing as a percentage of GDP would drop to 1.1% over that period. Seventy percent of the fiscal tightening plans would come from spending cuts, while the rest will come from taxes that include a controversial bank tax, a rise in the VAT to 20% from 17.5%, and a hike in capital gains tax. The spending cuts will take the form of reduction to welfare payments by £11 billion a year and a reduction in government departments of £17 billion. That would reduce the average budget of non-protected departments by 25%.
The budget also reduced the growth forecasts for the coming year as 2011 growth is seen at 2.3%, down from the previous government's estimate of 3% growth.
The GBP/USD bounced up on the news as it means the government will have to issue less debt to finance itself a positive considering the concern about debt loads of the major industrialized nations. Germany has taken up austerity measures meant to slim down their deficits, and the new Japanese PM pledged to balance the budget in 10 years. The fear is that the cuts may derail the UK recovery and send the country back into a double dip recession.