UK Public Finances

In the latest blog for "Reading and Understanding Economics" I have commented on yesterday's emergency budget in Ireland. A similar budget will soon be required in the UK. As the FT Lex column stated on the 6th April "Gordon Brown’s reputation for fiscal rectitude is as battered as a deep-fried Mars Bar. Diet-wise, the fabled Scottish delicacy may soon be all many voters can afford". Even a normal economic downturn spells bad news for public finances as government revenue falls (lower income, sales and corporate taxes) and public spending increases (higher social security payments). According to the independent Institute of Fiscal Studies the current severe recession has resulted in the UK budget deficit hitting an alarming 11% of GDP. Make no mistake after the next election which has to be before the 3 June 2010 there will need to be a combination of sharp rises in taxation and savage cuts in public spending in order to get public finances back under control. This will inevitably impact on the prospects for the UK stock market as any economic recovery that is in place by then will be vulnerable to this twin attack of fiscal tightening. Against this background it is hard to see a strong and sustained recovery in the UK equity market.