Highlight | Budget 2011

Budget 2011

Following last year's dramatic austerity measures announced in May 2010, George Osborne is set to unveil his 2011 Budget on Wednesday. But what is the Budget likely to reveal? And how will the markets react?

Most of the government rhetoric in the lead up to the 2011 Budget has been championing the beneficial effect the cuts have already produced on the UK economy. In May, June and October 2010, the Chancellor announced austerity measures totalling £81 billion over the next four years, in an attempt to reduce the budget deficit from the current 11% of GDP to 2% of GDP by 2015.

The cuts do indeed appear to have made something of an impact. The influential Ernst & Young Item Club recently reported that the government is expected to gain an £8 billion windfall this year, due to lower spending and higher tax revenue. However, with UK GDP contracting by 0.6% in the last quarter of 2010, many commentators are arguing that the measures have hit the economy too hard and are currently stunting growth.

Market View

Christopher Beauchamp, one of our research analysts, takes a look at what we can expect in the Budget, and what it could mean for the markets:

'Wednesday's Budget may prove to be something of a non-event compared to the "shock and awe" of last June, when the newly-installed Chancellor unveiled his plans to rebuild Britain's economy. It remains unlikely that Mr Osborne will pull any special rabbits from his red briefcase, having already said that any "watering down" of spending cuts would be a mistake. However, we're still likely to see some reaction from the markets.

'The government line, which has much truth to it, is that the austerity programme restored the confidence of global markets in the UK economy, and that any deviation from this would create worries that Britain was no longer serious about tackling its deficit. Such an event would likely result in falls for sterling, while borrowing costs for the British government will rise.

'In terms of the stock market, any caution on the outlook for growth could lead to falls, but this Budget is a small matter compared to the major events currently moving markets. Mr Osborne may use lower-than-forecast borrowing figures to dole out some sweeteners for the hard-pressed British consumer, such as a freeze on fuel duty, but overall the message is likely to be "steady as she goes".'

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The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.

Updated: 22/03/2011