By CLIFF TAYLOR
Finance Editor
THE new Minister for Finance, Mr McCreevy, may have got some good news about his own budgetary arithmetic from the latest Exchequer returns but British Chancellor of the Exchequer, Mr Gordon Brown's sums will not have pleased him. Crucially, the first Labour budget has done nothing to take the steam out of sterling's rise, threatening more dilemmas for the Government and the Central Bank on the foreign exchange markets.
Mr Brown was expected to move to curb consumer spending and put a lid on the British economy. However, while he moved to increase taxes, the initial reaction of analysts was that he had not done enough to curb consumer spending. Consumers will be hit by higher prices on the "old reliables" of alcohol, tobacco and petrol but little else was done to hit their pockets apart from a reduction of mortgage interest relief and the result was that investors and City analysts were last night betting that another rise in British interest rates is on the way.
The chancellor estimated that his measures would mean a squeeze of around Pounds 5.5 billion on the economy this year or around 0.5 per cent of national output. But, as much of this related to the once-off utilities tax, analysts calculated that the real restraint was no more than Pounds 2 bit lion to Pounds 3 billion. "A very light foot on the brakes" was how one analyst characterised the package and the government bond market reacted badly to resulting fears that the newly-independent Bank of England would have to push up interest rates to cool the economy.
The inevitable result was that sterling rose further on the markets, reaching a five-year high of DM2.94 at one stage, before easing to close below DM2.93. The pound rose with sterling on the markets, gaining more than two pfennigs against the deutschmark in after-hours trading to be quoted around DM2.6550. Against sterling the pound slipped 0.5p to 90.50p in late trading.
The prospect of a further surge in sterling's value is bad news for the Government and the Central Bank. A fall in the pound's value against the British currency threatens to fuel inflation. The only thing which has stopped the Irish currency from falling too rapidly against the rising sterling in recent weeks is persistent speculation that the pound's central rate will be revalued in the ERM in the months ahead.
If the revaluation rumours end, the pound could fall sharply against sterling. However, if the Irish currency continues to rise in tandem with sterling, it is not good news either. The Government would no doubt prefer the currency to trade nearer its central rate in the ERM in preparation for monetary union membership.
It is now some 24 pfennigs above its central deutschmark rate, posing a dilemma for the monetary authorities in deciding how to manage the transition to monetary union.
The other elements of the British budget do not appear to have major implications for Ireland. As IBEC pointed out, a cut in the corporation tax rate from 33 per cent to 31 per cent and the small company rate from 23 per cent to 21 per cent is a boost for British business, but they were also hit by an end to tax credit of dividend payments, which will mean many actually pay more tax:
