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Budget: The bankers are back in charge

Keeping up investor confidence in Britain plc has become the number one priority for the government

• 
• • Dan Roberts
  • guardian.co.uk, Wednesday 22 April 2009 18.13 BST
  • Article history

For much of the last year, the City has felt angry politicians breathing down its neck. Today the tables were turned: the bankers are back in charge.

It might not look so from the headlines. Soaking the super-rich means a top fund manager rubbing along on, say, £500,000 will have to hand over an extra £50,000 in personal tax. But when it comes to the nation's finances, these masters of the universe will call the shots in future.

The reason is we need them to fill the colossal black hole in the public accounts. This year alone, investors must lend us at least £220bn to keep the show on the road. With foreign investors diverted by troubles back home, much of this will need to come from City pension funds, insurers and savers.

Even on the chancellor's heroic assumptions about imminent economic recovery, the following years will be little better – probably £200bn a year worth of new gilts will need to be issued for the forseeable future.

The consequences of refusal – a "gilt strike" to ressurect the 1970s parlance – do not bear thinking about. We had a taste today when City alarm at the chancellor's largesse caused a mini run on gilts and sterling. Dealers were said to be terrified at the prospect of a possible downgrade in government debt by ratings agencies.

If this sounds far-fetched, just look at Dublin. The Irish government has already seen Moody's warn of a downgrade in its sovereign debt and has had to a respond with a belt-tightening budget that has only deepened its recession.

We are not there yet, and it is hard to see what else Darling could have done in the circumstances, but we are perilously close to the Dublin moment.

In future, every twitch of Darling's bushy black eyebrows will be monitored to check he doesn't lose his nerve. The election will be fought under the beady eyes of the gilt market. Whichever party looks like winning will have to tailor its manifesto promises accordingly. Only the unelectable will be able to promise the earth in future.

This is why there was not more in the budget to help put the economy back on its feet; we simply cannot afford it. As Mervyn King warned a few weeks back, Gordon Brown's hopes for fiscal stimulus on a meaningful scale were unrealistic. The best that Darling could hope for today was that the global economy gradually improves and that the "natural stabilisers" of existing public spending promises do their best to stop it getting any worse here.

Keeping up investor confidence in Britain plc has become the number one priority for the government. All the more worrying therefore that the first reaction from the CBI was that Darling had failed to "set out a credible and rigorous path for restoring the public finances to health". If fixed income fund managers take the same view and put their money elsewhere, this budget could be as cheerful as it gets.