Portugal: no boom, but still bust
What happened yesterday?
Little of consequence. At least, not here in the UK. Alistair Darling stood up. He gave a speech in which he tried to clear the Labour party of any responsibility for the state of the economy they've been running for the past 13 years. He bribed first-time buyers. He battered cider drinkers. Then he sat down.
Both sides then got down to the serious business of trading insults over how corrupt the other party's members are. Anyone who actually cares about how the British economy is going to get out of this mess might have felt the urge to go in there and slap the lot of them.
And while we were all watching the Chancellor try to rewrite history, elsewhere in Europe, Portugal was warning us of what happens when people lose faith in your ability to repay your debts...
Yesterday's Budget was just election campaigning
We covered most of the headline grabbers in our Budget coverage yesterday. I have to say that my overwhelming sense from the whole thing was, "what's the point?"
There's something about Alistair Darling that makes you want to give him the benefit of the doubt. It might just be the fact that he's not Gordon Brown. But this really was just a cynical piece of election campaigning.
Stephen Barber at online brokerage Selftrade summed it up well: "This was a neutral budget for investors, since it wasn't a budget at all. Budgets set out taxation and spending. But the Chancellor told us his taxation plans in the pre-budget report three months ago. Spending won't be revealed until the comprehensive spending review after the election in the autumn. This was a political act which drew the dividing lines for an election campaign which begins in earnest today."
He fiddled with stamp duty in the hope of giving house prices a little bump up in the month before the election. But what happens after, when all those first-time buyers who paid too much are left with rising interest payments and falling equity?
He categorically denied that the recession had anything to do with Labour's economic governance. But if that's true, how come we're one of the last countries to emerge?
He said that efficiency savings will be made. But given the government's track record on that front, how can we believe that's realistic?
And it's this point – the deficit – that really does need to be addressed. By the end of this tax year, Britain is expected to have overspent by £167bn. That's all added to our national debt. Next year, and the year after, we'll still be overspending by £160bn-odd a year. So that gets added to our national debt too. And even if we do halve the deficit by 2013/14, as promised, we'll still be adding to the debt pile.
The UK's in a vulnerable position right now – just look at Portugal
And a lot of these predictions depend on us having good economic growth every year between now and then. That's a very vulnerable position to be in. There's not much room for error or bad luck. Do you really believe that in the next four years there won't be any more macro-economic shocks? And we're now surely at the point – if we're not already past it – where any further rises in the state's tax take will just be counter-productive.
And if you want to know what happens when people start to worry that a country can't repay its debts, you just need to take a look at what happened in the eurozone yesterday.
Portugal was downgraded by ratings agency Fitch, from AA to AA-. To give you some perspective, Britain is AAA (still), while Greece is BBB+.
I feel a bit sorry for Portugal. They didn't have a boom, and they've still managed to have a bust. Of course, the economy is much smaller than Britain's. It's also structurally pretty sclerotic – which is what happens when too much of your economy is dependent on government bureaucracy. That's why we've still got a AAA rating even with our budget deficit at 11.8% of GDP, while they've been downgraded even although their deficit is 'just' 9.3% of GDP.
Douglas Renwick at Fitch said: "Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than 15 European Union peers, which will put pressure on its public finances over the medium term."
How can you profit in this mess?
As a result, the euro took a hammering against the dollar, falling to a ten-month low. We've been suggesting that the spread betters among you short the euro against the dollar for most of this year now, so hopefully it's been a winning trade for any of you who have done it. We also write about some other potential trades in the current issue of MoneyWeek magazine (if you're not already a subscriber, claim your first three issues free).
Do bear in mind, if you're tempted, that spread betting is a risky business. It's not like buying shares (which is risky enough in itself). You need to use stop losses, you need to be disciplined, and if you make mistakes you can lose an awful lot of money in a very short space of time. If that hasn't put you off, then to get a great deal on an account provider, check out our spread betting comparison service.
As for the pound – well it fell yesterday against the dollar, but rose against the euro. What that suggests to me is that the markets felt exactly the same about the Budget as we did – it was a non-event. The real Budget will come after the election, be that under Labour, Conservatives, or Lib Dems. And Lord help us if they make a mess of that one.
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