The YouGov poll published for UK newspaper The Daily Telegraph shows that the UK government’s tax-and-spend plans have given UK Prime Minister Gordon Brown a bounce.
The opinion poll — conducted after the government’s GBP 20 billion stimulus plan was announced on Monday — shows that Labour is now up three percentage points at 36%, while the Tories lead has shrunk two percentage points to 40%.
UK Chancellor of the Exchequer Alistair Darling’s pre-budget report contains a GBP 20 billion tax-and-spend plan that aims to keep the UK economy from slipping into a deep recession, and eventually spur a return to trend growth.
Sterling/dollar rallied to fresh session highs of $1.5175, while the FTSE 100 extended strong gains to settle up nearly 10% at 4,152. Yields for both the UK two- and 10-year notes rose slightly.
The slightly larger-than-expected fiscal measures may keep the Bank of England (BOE) from cutting rates a bold full percentage point, and instead allow for a more muted easing of 50 basis points. However, some economists believe the fiscal measures are insufficient, and that the BOE will be forced to significantly lower rates in the first quarter.
“There is little obvious benefit to the economy, (it’s a) borrowing binge and the gilt market has a lot more bad news to price in,” said Marc Ostwald, strategist at Monument Securities, said.
Darling cut the UK’s GDP growth estimates this year and next to 0.75% and as much as minus 1.25%, respectively, and said the economy would return to a growth rate of 1.5% to 2% in 2010 with the help of the government’s fiscal measures, which include:
* A cut in the VAT sales tax rate on luxury items to 15% from 17.5%, effective on Monday, December 1 through 2009.
* A deferral in a planned corporation tax increase and other measures to help small businesses.
* An extra GBP 5 Billion in efficiency savings for a total of GBP 35 billion over three years.
The tax relief will be funded by a sharp rise in public borrowing. Borrowing will rise a whopping GBP 118 billion in fiscal year 2009/10 after a rise to GBP 78 billion in fiscal year 2008/09. Britain’s Office of Debt Management increased planned gilt issuance to GBP 146 billion in 2008/09 from GBP 110 billion previously, with ten additional gilt auctions and four mini-tenders now scheduled in the remaining fiscal year.
“The borrowing requirements for the next two years blew my brains away,” said David Buik, stock market analyst at BGC Partners. ” We are massively concerned that it’s a question of live now, pay later, and we don’t think the strength of the economy warrants it at the current state.”
The government also plans to fund the stimulus measures by raising the top tax rate for those earning more than GBP 150,000 a year, the first income tax rise in 33 years, as well as increases in alcohol and tobacco duties.
UK yields on two- and ten-year notes rose slightly as UK Treasurer Alistair Darling outlined a slightly larger-than-expected fiscal stimulus plan worth GBP 20 billion.
The larger fiscal measures may mean the Bank of England (BOE) may lean towards lowering UK rates by 50 basis points at its next scheduled meeting on December 4, instead of trimming rates by a full percentage point.
Sterling/dollar rose above $1.51 minutes after UK Treasurer Alistair Darling began his pre-budget report to the House of Commons.
Cable is holding gains of around $1.5080 as Darling outlined his GBP 20 billion tax-and-spend fiscal giveaway versus expectations for GBP 15 Bln. The larger-than-expected fiscal stimulus plan may mean the Bank of England (BOE) will be more inclined to trim rates by 50 basis points, instead of taking a more aggressive stance.