Sterling sinks below 1.50 again

The consolidation period for Sterling did not last long with overnight Asian trading and so far this morning it has been under selling pressure again. 

The reason for the fall today has again been attributed to narrowing polls showing that Labour and conservatives are "neck and neck". 

In addition credit rating agency Fitch has stated that the UK sovereign credit profile has deteriorated and Moody’s has warned that some UK banks could face downgrades. 

To top it off we have received poor economic data with UK RICS house price balance coming in weaker than expected and the UK January trade balance was also weaker than anticipated.

Elsewhere the euro has come under some pressure too against the USD and the JPY. 

Although the Greece situation is becoming yesterday's news, there are a number of other economies to replace Greece such as Portugal and Italy for starters. Expect the euro to remain under pressure for the foreseeable future.

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Sterling crashes through 1.50 to US Dollar

After being sold aggressively across the currency markets yesterday the markets have taken a breather and we now await the next move. 

The political focus with the opinion polls over the weekend indicating that the chances of a hung parliament were much higher. A hung parliament may actually prove successful, however the markets do not like uncertainty and the consensus is that a coalition government will have less political clout to push through the decisive decisions especially in relation to tough fiscal planning which is inevitable.

The Conservatives have come out of the traps today stating that protecting the AAA status is central to their plans- however some feel their proposed aggressive cuts will be detrimental to recovery. 
 
On the other hand Labour propose to wait and cut later but waiting too long could mean that the horse has already bolted and the AAA rating could be lost. So this uncertainty and division is leading to a weaker pound. 
 
Yes this could be good for the UK economy and for recovery but there is a fine line between a weaker pound and the loss of confidence in Sterling and the UK economy- this would lead to a sharp rise in import prices and inflationary pressure especially if commodity prices remain high- not good; this would spill into a pressure on the UK gilt markets and inevitably the UK losing the AAA rating adding yet more pressure. 
 
So you can see the problem that uncertainty is creating. The Pound needs to get back above the psychological 1.50 level against the US Dollar. 

Sterling also lost yesterday on the purchase by Prudential of AIG’s Asian business which led to further selling of GBP and buying of USD in the light of this purchase. 

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Which is the weaker- Yen or Sterling?

Both Sterling and the Yen are being seriously undermined by both political and economic concerns and are racing each other towards the edge of the precipice.

On the Japanese political front, the replacement of Fujii by Kan as Finance Minister was not greeted enthusiastically and as mentioned yesterday the Yen took a little dip in value. 

The major concern, was that the Japanese bond market might take flight and the ability of the Ministry of Finance to satisfy the country’s massive debt mountain could become compromised. 

Added to this, the first official comments from Kan were distinctly Yen negative with him saying he wants the Yen to weaken further (it fell immediately from 91.10 to 91.75) and then adding that many Japanese firms favour the $/Yen rate at 95.00 and that he must work with the Bank of Japan to bring the Yen to appropriate levels. 

Beat that lot, sterling …. Well it did try its best.

On the UK political front, the call from the 2 cabinet members for a secret ballot of Labour MPs to establish Gordon Brown’s position as leader of the party was viewed very negatively by the market on the assumption that a leadership battle this close to the election would be the final nail in the coffin for the Labour party but also, might be enough distraction for them to take their eye off the economy. 

Following on from this, there is a report in the Times this morning headed up, "Cash-strapped Treasury contemplates shining up gilts" which ponders the possibility that the Government might be forced to offer higher returns on its gilts in an attempt to maintain their investment appeal. 

This will obviously have the effect of further increasing the cost of servicing the country’s borrowings from the current forecast of £60 billion per year - and that is just the interest component.

Old Black Eyebrows is seeking to sell a record £225 billion tranche of debt this year at the same time as the Bank of England look to offload the bonds that it acquired via the Asset Purchase Scheme as part of the QE process and against the back-drop of investor concern over the UK’s status as a AAA rated sovereign. 

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Euro even weaker than Sterling

The euro has again moved lower against the majors and in particular against the US Dollar moving down to 1.4523 overnight and overall down 500 points from recent highs. 

The cause of the downturn has been attributed to the recent jitters in Greece and more recently in Austria. 

The Greek prime minister commented yesterday that Greece does not have much time and must take tough decisions within the next three months- decisions that have been left for decades.  

In a very direct address he stated that “we must change or sink” and vowed that he will tax the bonuses of Greek bankers by 90%- move over Alistair Darling!

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Pre budget nerves for sterling

The Pre Budget Report will set out government plans for tackling the UK deficit and also define growth forecasts. 

A big factor will be how the government plans to reduce the deficit which is a major issue for the UK economy and the next government- expect lots of political sabre rattling as Darling attempts to set out a fiscal election strategy. 

The labour government has promised to cut the deficit in half within 4 years and the market will want to see a viable plan for this to give comfort to sterling. 

Other items could include a change in the growth forecasts, cuts in spending and increased taxes- possibly on bankers bonuses or even banking institutions…Darling says his plan will maintain credibility with investors, while protecting people most vulnerable to the recession- it needs to.

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Banks reform toothless and muddled say MPs

The labour Government’s white paper on financial regulation earlier this month was toothless and failed to address the key weaknesses in the Tripartite system, according to MPs on the Treasury Select Committee.

Issuing its final report on the banking crisis yesterday, the committee said it was still a “muddle” which part of the tripartite — made up of the Bank of England, Financial Services Authority (FSA) and Treasury — was in charge of strategic decisions.

The Treasury’s white paper proposed a new Council for Financial Stability, chaired by the Chancellor, which will oversee the Tripartite. This is just a “cosmetic” change, the Treasury Select Committee said.

The new council will be in addition to the Financial Stability Committee, which sits within the Bank.

The White Paper also gave more power to the Bank to monitor overarching stability — so-called macro-prudential regulation — but did not make it clear how that power would be separate from the responsibilities of the FSA.

“Where before no-one had a formal responsibility for financial stability, now many do — the Bank of England, the FSA, the Treasury, the Council for Financial Stability and the Bank's Financial Stability Committee. Where responsibility lies for strategic decisions and executive action was, and remains, a muddle” the report said.

John McFall, the committee’s chairman, also said that the Government should not rule out imposing a split between retail and investment banking.

Such a measure, which would echo the restrictions imposed in the 1930s in the US under the Glass-Steagall Act, has been widely criticised among banks which argue that the law is outdated.

But Mr McFall said that banks have been able to “hold the taxpayer to ransom” by growing so large that they present a serious systemic threat, making it impossible for the Government to do anything but bail them out during the downturn.

In order to prevent banks from becoming so large again, the Government should “not rule out drastic action, such as forcibly shrinking the banks or separating out the riskier functions,” Mr McFall said.

Separately, the House of Commons’ Scottish Affairs committee said yesterday that the FSA failed to provide the “necessary level of supervision” over Dunfermline to prevent the downfall of Scotland’s largest building society.

It was the fault of Dunfermline’s board that the mutual embarked on risky lending on commercial property and buying loan books from other lenders, the committee said, but added that the FSA failed to issue “clear and specific warnings”.

The FSA rejected the charge, saying that it had written to Dunfermline in December 2005 soon after a regulatory “Arrow” visit, identifying the growing size of its commercial lending portfolio as a risk.

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UKFI to outline plans for bank investments after losing £11 billion

UK Financial Instruments (UKFI), the body that manages the Government’s shares in some of Britain’s biggest banks, today admitted that it is sitting on paper losses of £10.9 billion.

The body, which is in charge of the Government’s 70 per cent stake in Royal Bank of Scotland and its 43 per cent holding in Lloyds Banking Group, also refused to give an indication of when it expected to dispose of the shares in the lenders.

The UKFI said today that every household in the country has more than £3,000 invested in Lloyds and RBS shares

The UKFI said: “Our own task of returning these investments to the private sector is challenging.

“The amounts involved are very large, and a successful disposal of our holdings will require professionalism and patience.”

The losses in the banks is less than the £18.1 billion shortfall revealed in February.

UKFI’s report makes clear that it could be years before RBS and Lloyds are back in private ownership, although the ultimate decision on any disposal will be taken by the Treasury.

It adds that the most likely exit for the labour Government will be through an initial public offering of the stakes.

“While there are many possible approaches open to us, including strategic sales, our central assumption in thinking about our disposal programme is that we are likely to be selling shares to investors in the public equity markets,” said the government body this morning.

The Government’s stakes in RBS and Lloyds will increase when the Treasury’s insurance scheme — the Asset Protection Scheme — kicks in. At that stage, taxpayers will probably own more than 80 per cent of RBS and more than 60 per cent of Lloyds.

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UK's debt will quadruple unless drastic steps are taken, says S&P

Britain's national debt will quadruple to peaks only ever seen in the wake of the Second World War unless the labour Government takes drastic steps to address the pensions and ageing crisis, Standard & Poor's has warned.

The ratings agency has calculated privately that the UK's public sector debt could quadruple from its current level of just over 50pc of economic output to 200pc or above within the next four decades as the cost of servicing public sector pensions, ballooning social security costs and healthcare burdens becomes overwhelming, The Sunday Telegraph has learned.

The warning is doubly sobering since S&P last month placed Britain's debt on to "negative outlook" – an explicit signal that it could soon be downgraded.

Although the agency calculated two years ago that the effects of an ageing population, alongside high pensions and healthcare costs could push Britain's net debt up above 150pc by 2050, it now fears the added cost of the financial crisis means the debt mountain could in fact rival that in 1945, when the cost of fighting a world war pushed debt well beyond 200pc of GDP.

The warning coincides with research showing that the true size of the UK's unfunded public sector pensions deficit, which needs to be funded through taxpayer's cash, is now £1,177bn – a staggering £20,000 for every person in the UK.

A study for the highly respected British North American Committee, written by former Bank of England economist Neil Record, finds that the UK shortfall is far more severe than in the US or Canada.

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Britain facing biggest deficit in Western world, warns OECD

Hopes that the biggest post war economic slump will soon end have been dashed after the rich world's leading economic institution slashed its forecasts for economic growth and warned that Britain next year faces the worst deficit in the industrialised world.

In a further blow for Alistair Darling, the Organisation for Economic Co-operation and Development also warned that the Government may have to pump more than £130bn extra into the banking system.

Most economic statistics released in recent months have been better than expected, including the CBI's distributive trades survey yesterday, which was the strongest for a year.

However, the OECD downgraded its forecast for UK growth this year to a contraction of 4.3pc – compared with a previous forecast of -3.7pc.

The cut is significant, since the OECD chose on the other hand to increase its growth forecast for the world's leading industrialised economies from -4.3pc to -4.1pc. It added that the 30 member OECD would grow by 0.7pc next year, while Britain would stagnate, not growing at all.

The OECD said that not only was Britain's fiscal position far weaker than its neighbours, following many years of high borrowing by Gordon Brown, the UK was also more vulnerable to a consumer slowdown associated with falling house prices.

The Paris-based institution said the Government's fiscal deficit next year would climb to 14pc of gross domestic product – higher than anywhere else in the OECD, including Ireland and Iceland. The report urged the Bank of England to keep "the [interest] rate as close to zero as possible up to end 2010."

It also warned that more taxpayers' money may have to be poured into the financial system, saying: "further bank losses may well require substantial further capital injections by governments." It said the UK may have to spend a further 3-9pc of GDP – equivalent to £45bn-£135bn.

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Public borrowing hits record high of £20bn

Public borrowing hit a record £19.9 billion in May as the recession continues to take its toll, official figures revealed yesterday morning.

May's borrowing was nearly double the £10.6 billion borrowed in April. Public sector net borrowing for this financial year is now £30.5 billion — more than twice the level seen at the same stage 12 months earlier.

Even though May is traditionally a weaker month for public finances, borrowing over the month is the biggest figure since the Office for National Statistics’ (ONS) records began in 1993.

Public sector net debt reached £774.8 billion last month, equivalent to 54.7 per cent of gross domestic product (GDP), far exceeding Labour's now defunct fiscal rules which said that debt would never exceed 40 per cent of GDP.

The number of people claiming unemployment benefits has risen by more than 80 per cent over the last year as companies cut jobs in the face of the sharp economic slowdown.

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Sterling slides as pressure on Gordon ditherer Brown remains

Sterling came under renewed pressure on foreign exchange markets on Monday morning as the Labour Party's heavy defeat in the European elections intensified pressure on the liar Gordon Brown.

The results of the European elections, which look set to see Labour trail in third after the Conservatives and UKIP, sent the Pound down by a cent by lunchtime in London.

It weakened by a cent to $1.5880 as dealers in London - where the majority of currency trading takes place - digested the results. The currency also fell against the euro at about 87p.

Sterling has been on the backfoot since a spate of resignations, and last week's local election results intensified speculation about whether Mr Brown can survive in Downing Street. Analysts said that the continued uncertainty is giving dealers good reason to dump the pound.

Investors will be particularly worried that a weakened Government will not be able to drive through the measures required to cut the Budget deficit.

Others caution, however, that the pressure on sterling will be tempered by signs that the UK and the US economies are stabilising after the "free-fall" that marked the six months that sandwiched Christmas. Analysts at Barclays reckon that sterling could claw back to $1.70-$1.80 later in the year.

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Labour's death throes rattle Sterling

Sterling tumbled against the dollar and the euro today on worsening political instability after James Purnell, the Work and Pensions Secretary, stepped down from the Cabinet.

The pound, which this week hit a seven-month high of $1.67, fell by 1 per cent to $1.6031 as Gordon Brown began an emergency reshuffle after the departure of three Cabinet minister this week. One euro is now worth 88.42p.

Despite the downward trend on sterling, blue-chip stocks were positive, with the FTSE 100 lifted by the mining sector.

The leading index gained 69.29 points, or 1.52 per cent, to 4,456.23 in early trading, with Rio Tinto the strongest riser, up 12 per cent to £30.52, after it walked away from a deal with Chinalco, the Chinese state-owned metals group, that had been unpopular with shareholders. Instead, investors will be able to participate in a $15.2 billion rights issue.

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Wise Money warns Britain may suffer a double recession

One of the world's most influential economists warns today that Britain faces the prospect of two recessions in quick succession.

Robert Shiller, Professor of Economics at Yale University, said that the recent stock market bounce should be treated with caution.

He likened the current sense of optimism to a marital row. “You don't know whether the argument with your wife is really over or not. Is the problem something that your spouse will bring up again, and again?”

The apparent upturn could soon go into reverse, he told The Times, marking a repeat of economic patterns in the 1930s and the 1980s.

Such a double-dip slowdown has been nicknamed by economists a “W-shaped” recession, where recovery is so fragile, the country could be plunged into another slowdown as soon as it emerged from the last.

Since March the stock market has rebounded by 27 per cent, raising hopes that the recession may not be as severe and protracted as many economists had feared.

Some have interpreted the recent rally as a sign that the banking system - which imploded after Lehman Brothers, the US investment bank, went bust in September - has stabilised and that confidence is returning.

Last week Alistair Darling, the Chancellor, brushed aside doubts that his Budget forecasts had been overoptimistic and predicted that the recession would be over by Christmas. Many economists in the City believe that Britain will stagnate until the end of 2010 and that unemployment will continue to rise well after that.

Speaking to The Times this week, Professor Shiller said: “I was last here [in London] in the fall and there is definitely a sense of optimism now. The Fed [US central bank] and the Bank of England seem to have things under control. Everything seems to be getting better.”

However, he warned that “there is a real possiblity of another recession. We may well see more bad news. It is a real failure of the imagination to think otherwise.”

He said that there were a number of issues that threatened any long-term recovery for the British economy - rising unemployment, mortgage defaults, and another wave of new company failures that “could surprise us yet”.

Professor Shiller also said that the banks were still harbouring large portfolios of troubled assets.

“We all want to lick this problem — there's been a burst of confidence over the last few months, but really it's not based on any news. A lot of people think this recession is coming to an end. But I'm not so sure. A resurgence in confidence may not translate into new jobs. We are still in uncertain times.”

He added: “In 1931 in the US, President Hoover unveiled his recovery plan - there was a huge stock market rally — the market improved but it didn't hold because bad news kept coming in. Increased confidence can be a self-fulfilling prophecy but it doesn't always hold.”

Professor Shiller said, however, that he believed another likely scenario to be one where Britain would face a continuous decline with house prices falling for a number of years, drawing comparisons with the decade of misery in Japan in the 1990s.

The economist became well known when he predicted the timing of the end of the dot-com boom in March 2000, and was one of the first to warn that the US housing market was perilously overvalued and that its collapse would cause devastating reverberations across the world's biggest economy.

Professor Shiller has been in London this week promoting his book Animal Spirits. How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, in which he argues that our own psychology and emotions, such as envy and resentment, drive house prices, debt levels and share values.

His co-author is George Akerlof, who won the Nobel Prize for economics in 2001. In the book, they argue: “What had the people been thinking? Why did they not notice until real events — the collapse of banks, the loss of jobs, mortgage foreclosures — were already upon us. The public, the Government and most economists had been reassured by an economic theory that said that we were safe. It was all OK.

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UK Taxpayer faces £17.6bn loss on bank investments

The UK taxpayer would make a £17.6bn loss if the labour Government sold out of Lloyds Banking Group and Royal Bank of Scotland at today's prices.

The figures, compiled by analysts at Exane BNP Paribas, make even a partial sale of the Government's stake in either bank before a general election next spring look highly unlikely.

The analysts calculated that the state's holding in Lloyds is £10.9bn underwater and £6.7bn out of the money at RBS.

"We continue to view UKFI [the body managing the investments] as a (very) long-term shareholder," Exane's Ian Gordon said. "We assume that the test likely to be applied by UKFI is one of absolute return to (at least) break-even. That could be a long wait."

UKFI has said it expects to sell the stakes piecemeal back to the market as soon as possible. The taxpayer owns 43.4pc of Lloyds, acquired at an average of 124.55p, and 70.3pc of RBS, bought at 51.21p. The stakes rise to 62pc and 95pc respectively once the "B" shares used to pay for the toxic debt insurance scheme are included.

Lloyds shares yesterday fell 6.09 to 70½p after adjusting to take account of its £4bn placing and open offer. RBS, which announced 700 job losses in IT and property yesterday under plans to cut around 20,000 staff globally, fell 0.7 to 42.4p.

Some of the potential losses in Lloyds could be recovered sooner, though, after the lender warned the Government might renegotiate the terms of the asset protection scheme (APS). In the prospectus, the bank said: "Negotiations are continuing and, although not currently expected by the board, may result in changes to the terms announced on March 7."

The Treasury sought to downplay the warning, saying: "The Government is now undertaking a detailed examination of the assets and will announce final details in the coming months. We have not changed our initial assessment of the overall taxpayer exposure."

The prospectus further revealed that European regulators could force Lloyds to unpick its merger with HBOS. In return for state aid approval, the EU may demand "the cessation or disposal of certain parts of the business [that] ... could require the group to divest or exit core businesses".

Lloyds was outlining potential risks ahead of the placing and open offer to redeem the £4bn of preference shares the Government took as part of last October's bank recapitalisation. It is issuing 10.4bn shares at 38.43p – a 54.6pc discount to the closing price on May 13.

Lloyds is paying the Government an underwriting fee of £60m and covering its legal costs of £30m. The taxpayer will make a further £40m as the terms of the deal are that the preference shares are redeemed at 101pc of the issue price.

The £100m the Government will make on the deal comes on top of the £995m in profit the Bank of England has made from its emergency support packages for the financial system, but will have little impact on the billions of potential losses.

Lloyds said converting the preference shares into stock will remove the annual £480m cost of paying dividends on the stock, and "will thereby improve the group's profitability, cashflow, liquidity and organic capital generation".

It will add 0.8 percentage points to its core tier one capital, taking the ratio to 6.7pc before the effect of the APS, which is expected to lift the ratio to 14.5pc.

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UK ministers 'to blame' for financial crisis

UK Governments and central bankers must take the blame for the financial crisis - not bankers, investors and others in the market, according to a new study.

The Bank of England has a whole variety of counter-cyclical policies it could have used to avert the crisis, say economists.

In a comprehensive analysis of the causes for the financial and economic crisis, the Institute of Economic Affairs (IEA) has concluded that the disaster was caused by authorities' mistakes rather than market failures.

In an associated letter to The Daily Telegraph, the IEA, supported by a number of leading economists, including Tim Congdon and John Kay, said that despite these failures regulators were being rewarded with more responsibilities.

The study suggests that hedge funds and tax havens should not be unduly punished, and that in the future central banks and regulators should pay greater attention to imbalances building up in the economy.

The detailed analysis, Verdict on the Crash, will come as a further blow for Gordon Brown, claiming that the system he created to monitor the financial and economic system was found entirely wanting and is in need of a major overhaul.

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UK Budget 2009- Britain's debt will not be under control until 2032

The unprecedented burden of UK public debt built up by Gordon Brown will not be brought under control for nearly a quarter of a century, economists have said.

”Debt freedom day”, when the national debt returns to sustainable levels, will not be reached until 2032 - another 23 years away, the respected Institute for Fiscal Studies said.

Families could soon find themselves paying at least another £1,400 a year in tax as part of the Government’s attempts to bring public debt back under control, the IFS predicted.

It said there was a gap between the amount of money that would be raised by the tax measures in this week’s Budget and the amount the Government will need to fund its spending plans.

This secret “blackhole” could end up adding another £1,430 each year to the average families’ tax bill, it said.

The stark warning of a generation of austerity ahead came as Alistair Darling admitted he could not be sure his optimistic forecasts for a quick economic recovery would be realised.

“It is very difficult to be absolutely certain as to what will happen,” he admitted.

The Chancellor’s predictions for growth to resume by the end of this year and to reach boom levels again by 2011 have been widely questioned, with the International Monetary Fund suggesting the British economy would actually shrink next year - despite Mr Darling’s forecast of modest growth. “The crisis is far from over,” it said.

The IFS warned that despite the tax rises and spending cuts announced in the Budget this week, future chancellors would be forced to raise even more money to fill a “breathtaking” long-term hole in the public finances.

The scale of the problem is so great that even with years of tax rises and spending cuts, the national debt will not be low enough to meet Gordon Brown’s now-abandoned “sustainable investment rule” until 2032.

This “golden rule” dictated that Government debt should not rise above 40 per cent of Gross Domestic Product (GDP).

In the Budget however, Mr Darling said he would borrow another £700 billion over the next five years, pushing the accumulated stock of Government debt to £1.4 trillion, equal to almost 80 per cent gross domestic product.

The golden rule on borrowing, which Mr Brown actually announced when he was Chancellor, has been “temporarily suspended” as the UK economy endures the worst recession for 60 years.

Mr Darling has set out plans for debt to peak at 76.2 per cent of GDP in 2013/14. Paying the interest on that debt could cost as much as £58 billion a year by then, more than annual spending on schools in England.

Bringing the debt back to the level Mr Brown once said was necessary for economic stability will take another 23 years, according to Carl Emmerson, an IFS economist. “Public debt will remain high for a generation,” he said.

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Alistair Darling's UK Budget derided as fantasy

UK's Alistair Darling's 2009 Budget has been derided as a stew of unrealistic forecasts and missed opportunities, after the labour Chancellor conceded the current slump is comparable with the Great Depression but insisted it would be over by Christmas.

Mr Darling cemented his reputation as the Chancellor with the worst forecasting record in modern history after he slashed his projection for British economic output this year to -3.5pc.

Unveiling the biggest increase in government borrowing since the Second World War, he conceded that Britain's national debt will double to around £1.2 trillion in the coming years, and that the budget would not return to balance until 2018 or later.

In what economists described as a "fantasy Budget", Mr Darling imposed swingeing new taxes on those who earn more than £150,000, which will raise as much as £5.5bn a year by 2012 – one of the biggest per-capita tax increases in recent history.

But while he will try to trim some departmental budgets, he will nevertheless increase the total amount the labour Government will spend this year and the next by £37.6bn. This indicates that if he does intend to balance the nation's books, he will do so not with spending cuts but with tax rises.

However, the proposed tax and spending measures pale into insignificance against the scale and extent of the economic and fiscal crunch mapped out in the Budget small print.

The documentation reveals that this year's economic contraction will be the worst in any year since the end of the Second World War. Indeed, according to the International Monetary Fund, this year is likely to be the worst since the 1930s, as countries around the world slump into a synchronised slowdown.

The Chancellor predicted that despite shrinking by 3.5pc this year, the UK economy would start growing again "towards the end of the year", with 1.25pc growth next year and 3.5pc from 2011 onwards. Last night economic historians were trying in vain to find examples of developed countries that had stomached so significant a one-off drop in growth and yet managed to recover within 12 months.

As the IMF pointed out last week, recessions associated with financial crises tend to be more protracted and virulent than almost any other type, and that is precisely what the UK faces.

Indeed, alongside many City economists, the IMF expects the UK economy to shrink by a further 0.4pc next year – significantly below even the Chancellor's revised forecasts.

Dig a little deeper into the Budget and it becomes clear that the Treasury expects nothing short of a full-scale consumer recovery – if not boom – in order to satisfy its projections. Such a prospect seems unrealistic if not outlandish, according to City experts.

"It's just wishful thinking," said Peter Spencer, chief economic adviser to the Ernst & Young Item Club. "It's impossible to find a period when that sort of recovery has actually come through … If you believe that, you'll believe anything."

Even taking at face value the Chancellor's forecasts, the UK will have to borrow some £175bn this year and £173bn the next to make up for the shortfall in tax revenues and extra demands on the public purse from increased social welfare spending.

At over 12pc of gross domestic product, these represent the worst years for the public finances since the 1940s. However, the optimistic economic forecasts are doubly significant in this case because higher growth means a lower deficit. Should the Chancellor's economic projections be proven wrong, the eventual outcome for the national accounts will be worse still, according to City analysts, with total borrowing likely to surpass £200bn and not to peak until next year.

"This leaves the already horrendous borrowing projections looking too optimistic," said Ross Walker, an economist at Royal Bank of Scotland. Michael Saunders, chief UK econmist at Citigroup, said: "I shake my head in despair. As the Chancellor faces a terrible fiscal position no one outside the Treasury will believe the forecasts. When I saw the public spending plans I nearly fell off my chair," he added.

The tidal wave of extra debt will push up Britain's net national debt from below 40pc – one of the ceilings set by Gordon Brown in 1998 but since abandoned – to almost 80pc.

The Treasury said it still had no plans to reinstate any fiscal rules to bring its borrowing back under control in the future. In fact, it said it did not expect the budget to come back into balance until 2018 or beyond.

The Budget came amid continuing bad economic news, with the Office for National Statistics announcing that unemployment jumped by 177,000 to 2.1m in the three months to February, taking the jobless rate to 6.7pc.

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