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Wednesday, 27 November, 2002, 18:53 GMT
Borrowing shock for City
Budget graphic including City trader
The City: Surprised by the borrowing projections
The chancellor's pre-Budget report included a "nasty shock" for the City, according to traders, with borrowing much higher than feared.

Gordon Brown forecast borrowing of 20bn for the year to April 2003, against his earlier prediction of 11bn.


The markets are not going to like these borrowing figures

Adam Law, Barclays Capital

This was substantially higher than most economists had expected and was compounded by a further rise in forecasts for the year to April 2004, up from 13bn to 24bn.

Economists conceded that the decision was the chancellor's safest option and a far wiser move than raising taxes or cutting spending.

However, they also warned that it was something of a gamble.

'Old trick'

"What will worry the City is over the medium term, if economic growth isn't met, then it's a serious problem," economist Neil Mackinnon told the BBC.

Adam Law, chief economist at Barclays Capital, told the BBC that most traders had been prepared for this year's forecast to rise, but to a more conservative figure of between 15bn and 16bn.

Mr Law said the upwards revision was "very nasty".


The decision to revise borrowing figures upwards may well put pressure on the Bank of England to increase interest rates

David Frost, BCC

"The markets are not going to like these borrowing figures," he said.

Despite this sentiment, the stock market managed to hold on to gains earlier in the day to close up 1.8% or 73 points at 4,144.

Mr Law suggested the chancellor might in fact only be "trying his old trick, which is to surprise the incoming budget" by painting such a gloomy picture that the actual budget appears more positive by comparison.

"If he says it's going to be bad, it might look better," said Mr Law.

Sweet and sour

The British Chambers of Commerce (BCC) described Mr Brown's statement as "a mix of sweet and sour".

David Frost, director general of the BCC, said: "We are concerned that the decision to revise borrowing figures upwards may well put pressure on the Bank of England to increase interest rates.

"This would have a grave effect on manufacturers, given the current tough economic climate."


We're fairly relieved that he's avoided a rise in taxes

CBI

But Mr Brown focused in his speech on the weak global economy, describing the current situation as "the worst global slowdown for 30 years".

Analysts suggest that under those conditions, it would be imprudent to raise interest rates.

"For a rate hike to be considered what we need to see is wider evidence of global economic recovery," Alan Smith from brokers Lehman Brothers told BBC News Online.

Increased premiums

Mr Brown's solutions were interpreted by many in the business community as the best available in such tough economic conditions.

Doug Godden of employers' group the CBI told BBC News Online that it was "sensible to go down the route of allowing borrowing to increase".

"We're fairly relieved that he's avoided a rise in taxes," he said.

Borrowing to continue?

Manufacturing industry was also relieved that the chancellor avoided tax rises.

"They (manufacturers) have been allowed some breathing space as, having painted such a gloomy picture of world trade, any further increase in costs would only have driven vital investment elsewhere and resulted in a faster exporting of our manufacturing base," said Martin Temple, director general of the Engineering Employers Federation (EEF).

What remains to be seen is if the Chancellor's decision to raise borrowing so sharply will prove a sensible long-term move.

Said Mr MacKinnon: "Investors and traders will be looking for some degree of assurance that borrowing at these levels is not going to continue."


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27 Nov 02 | Politics
15 Jul 02 | Politics
15 Jul 02 | Business
08 Nov 02 | Business
10 Nov 02 | Business
06 Nov 02 | Business
26 Nov 02 | Science/Nature
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