How markets reacted to the Budget
Markets had expected gilt issuance of £180 billion but Darling pencilled in a figure of £220 billion and market watchers say this could be as much as £260 billion over the next fiscal year.
For gilt investors buying today this translates to an annual yield of just 3.43% if investors hold a 10-year bond until redemption, compared with 4.8% a year ago.
Stock market sanguine
On the stockmarket, David Buik, spokesman for BGC Capital Partners, says insurance companies and asset managers were the biggest losers as traders reckoned high earners would be disincentivised to put money into pensions and other savings products.
The chancellor had announced the income tax relief on pension contributions would fall from 40% for those earning more than £150,000, tapering to the basic 20% relief for those earning more than £180,000.
Valerie Smart, tax director, Scotland, at PricewaterhouseCoopers, says: "The cut in higher-rate tax relief on contributions to pension schemes may undermine incentives for private pension provisions. It also highlights the difference between those in public service and the private sector, given that private pension schemes have already been hit by the stockmarket collapse."
The wider stockmarket seemed to recover its poise after traders registered initial disappointment. At 2.30pm the FTSE 100 index of leading shares was down 0.5% but by the close it had rallied to 4,031, up 43.2 points, for a gain of 1.08%.
Reaction in the currency markets to the Budget was negative as traders digested the parlous state of public finances. Against the euro, sterling slipped nearly 2 cents to €1.114 and 2 1/4 cents against the dollar at $1.445.
"The figures for economic growth are optimistic at best, the chancellor has confirmed the alarming figures for borrowing. The tax increases and public spending cuts are insignificant against the size and scale of the government’s debt," says Alex Dunn, senior trader at Caxton FX.
"We see sterling falling in the short term against both the dollar and the euro, although against the latter, it will probably creep back as we approach the May meeting of the European Central Bank where further rate cuts are likely."
John Hardy, consultant foreign exchange strategist at Saxo Bank, says sterling’s recent rally is most definitely over as the government embarked on the "world’s most dramatic super-Keynesian experiment: massively expanding spending and the public balance sheet into the downturn in an effort to avoid a deflationary spiral".
He adds: "The chief problem for the UK is that it is launching this experiment from a profoundly weak starting point: the UK ran huge deficits when times were good and has terrible terms of trade to boot. So the only way it can finance new spending is by printing money, with the obvious end result of watering down its value."
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.