STERLING rose sharply against the deutschmark after City commentators indicated that Mr Brown's Pounds 5 billion move to tighten British government finances would not be sufficient to prevent further increases in interest rates.
Although Mr Brown forecast significant declines in public borrowing, with inflation remaining below 3 per cent, City economists were concerned that his measures failed to take enough heat out of the economy in the immediate weeks and months ahead.
Up two pfennigs during Mr Brown's budget speech, sterling stormed ahead shortly afterwards to show a startling gain of as much 3.75 pfennigs to DM2.9251, the highest rate for five years.
Further strengthening in sterling to DM3 is a distinct possibility if the Bank of England decides to counter the inflationary risks of the surge in consumer spending and house prices by sanctioning sharply higher interest rates.
Sterling's recent strengthening is discounting talks of a further half- point increase in British bank "base rates" to 7 per cent, possibly as soon as next week. But if growth in consumer spending and house prices shows little sign of cooling during the next few months, the Bank of England could well be forced into a series of increases in the autumn, lifting "base rates" to 7.5 or even 8 per cent.
Currency markets can be expected to lift sterling above DM3 if City fears of 8 per cent "base rates" show signs of being realised. Currency market worries about the balance of Mr Brown's budget measures mainly focus on his projections of fiscal tightening, taking Pounds 5.5 billion out of the economy this year and Pounds 4.75 billion next year.
This degree of fiscal tightening is unlikely to have much impact on the economy, at a time when consumers are receiving around Pounds 30 billion by way of "windfall" pay-outs, linked with stock market flotations of mutual building societies and insurance firms.
Viewed against this backdrop, economists warned that Pounds 10 billion or more needed to be taken out of the economy. Instead of Pounds 10 billion, Mr Brown cut back Pounds 5 billion, leaving the Bank of England with the responsibility of preventing the consumer spending spree from developing into a fully-fledged credit "bubble", replicating the mistakes of the late 1980s.
Mr Brown's failure to tackle the problem of excess demand in the economy is due to his determination to use his first budget as the platform for delivering promises made in the government's election manifesto.
His main objective, in raising additional tax revenue from the abolition of pension funds' tax credits on dividend income and the "windfall" tax on utilities is to meet the manifesto commitments rather than curb consumer spending.
Extra tax revenues will go towards funding the "welfare-to-work" programme aimed at getting the long-term unemployed and young people into work as well as real increases in funding for the National Health Service, education and public housing.
Providing a neat example of MrBrown's priorities was his decision to reduce the tax relief on mortgage interest payments from 15 to 10 per cent from next April, rather than go for abolition of tax relief in full, immediately.
