The Labour government's plan to halve the budget deficit over four years will soothe market concerns about Britain's debt burden, finance minister Alistair Darling told reporters in an interview on Thursday.
Government bond futures fell sharply, however, a day after Darling delivered a pre-budget report that shied away from detailing exactly how he plans to cut borrowing.
Markets are worried Britain could lose its top-grade credit rating unless policymakers take tough action to cut a deficit set to top 12 percent of gross domestic product this year.
“The steps that we have taken will reassure people that we have a credible, deliverable, realistic and fair plan to cut government borrowing over a four-year period,” Darling said on Thursday.
Darling has set out some of the ways it intends to do that but neither Labour nor the opposition Conservatives have set out enough detail to convince markets yet.
The Conservatives, tipped to win an election due by mid-2010, have said they want to move quicker than Labour in cutting borrowing, worried that a lower credit rating would mean higher borrowing costs.
But Darling has said cutting spending at such an uncertainty economic juncture could prove ruinous for the recovery.
“If you brought the process forward a year you would have to find another £26bn,” he said. “I just don't think that would be sensible.”
Confident on growth
Darling announced a rise in national insurance contributions on all but the poorest and slapped a one-off tax on bank-bonuses in Wednesday's PBR to help tackle the growing deficit.
He also revised up his 2009/10 borrowing forecast marginally to £178bn on Wednesday, saying it was better to support the economy rather than hinder it with cuts just yet.
The UK government bond market initially took some comfort from that, but prices plunged on Thursday as investors worried the government was not going far enough to reduce its debt.
“We are at a situation just now where things are still pretty uncertain,” he said.
“I want to make sure we support our economy into recovery but after that, make no mistake about it, the fact that government borrowing will have to come down by half over a four-year period will mean you have got some pretty difficult decisions to be taken right across the board.”
Darling said the government could create the conditions to bring about growth of around 3.5 percent in 2011 and 2012.
“I am confident we can get that growth,” he said. He added that the 50 percent levy on bank bonuses over 25,000 pounds announced on Wednesday was meant to alter behaviour in the financial sector.
“This measure was quite deliberately designed to be one-off, it's there to basically try and change people's culture, people's thinking,” Darling said.