The Pound declined against the Euro yesterday, falling to a low of 1.1714 on the session, after the UK government announced plans to sell a record amount of debt in the next fiscal year, while ten-year gilts snapped four days of consecutive gains as the cost of hedging against losses on government bonds rose to a record high.

In the pre-budget report, the Chancellor of the Exchequer Alistair Darling pledged to introduce the biggest round of tax cuts and spending increases in 20-years in an attempt to counter the UK’s first recession since 1991.

The £25.6 billion stimulus package over the next two years will swell the UK budget deficit to £118 billion in the 12 months through 2010 and at 8% of gross domestic product, the shortfall is the largest since at least 1970 and biggest within the Group of Seven nations.

The UK government is going one step further than his counterparts in the U.S, Europe and Asia as Gordon Brown tries to limit the impact of the worst global recession in 30-years and Britain’s fiscal package also includes a reduction in value added tax by 2.5 percentage points to 15% as the Labour Party try and bolster support in the build up to the election.

The giveaway in VAT is the largest initiative since 1988 when the then finance minister Nigel Lawson provided a boost equivalent to 1.2% of gross domestic product through tax cuts and the so called ‘Lawson Boom’ that followed ended in a housing bust in the early 1990s.

Yesterday’s stimulus package is equivalent to 1.1% of the economy’s value and the plans will force the government to sell a record £146.3 billion of bonds or gilts in 2008 and that represents an incredible 83% increase from the £80 billion planned just eight months ago and that puts into context the extent of the turbulence in public finances.

In order to help pay for the plan, the government also plans to raise the income tax rate for people earning more than £150,000 to 45% in 2011 and former Conservative Chancellor Kenneth Clarke said yesterday that the UK “runs the risk of having foreign exchange markets refusing to believe that the plan is credible and repayable.”

In addition, the Shadow Chancellor George Osborne commented that “this budget is all about the political cycle and not the economic cycle”, indicating that the fiscal stimulus package announced yesterday was designed to win votes rather than combat an economic slump.

Gordon Brown’s handling of the financial crisis has seen the government gain in popularity with some polls showing him narrowly leading the Conservatives in the year through September and the tax cut on higher-income earners is clearly aimed at the more traditional elements of the Labour Party.

However, the Pound failed to find any support against the majors in the aftermath of the report amid concerns that the new measures will not actually provide much of a boost to the flagging UK economy and there is an inherent risk that retailers will not pass on the saving to the consumer.

Alistair Darling also said yesterday that he wants to boost mortgage lending by guaranteeing securities backed by home loans and the plan will be based on findings from former HBOS Plc Chief Executive James Crosby who recommended the government auction roughly £100 billion in guarantees for mortgage back bonds.

According to estimates from the International Monetary Fund, the UK economy will suffer the worst slump of any G-7 nation over the next year as the decade long housing boom turns to bust and growth is forecast to contract 1.3% over the next year, compared to initial forecasts of 0.7% in the U.S and 0.5% in Germany.

The Euro made substantial gains against both the Dollar and the Pound yesterday despite reports in Germany that business confidence in the region slumped to the lowest level in almost 16-years in November as the global credit crisis weighed on demand for exports.

The Ifo Institute said its business climate index dropped to a reading of 85.8 from 90.2 in October, the lowest since February 1993, and the report will increase pressure on the European Central Bank to lower interest rates aggressively when policy makers reconvene next month.

The Dollar declined heavily against the majors yesterday, closing above $1.5150 versus the Pound, as the U.S currency suffered its biggest two-day loss against the Euro this month following reports that Citigroup Inc received a $306 billion government bailout for its troubled assets.

The rescue package protects the bank from further losses in bad assets, while injecting $20 billion of capital and bolstering the stock market value following its 60% plunge last week amid concerns that depositors may start pulling their money and destabilising the bank that operates in more than 100 countries.

The second biggest U.S bank by assets surged as much as 72% in New York in the aftermath of the Treasury’s announcement and in return for the bailout and guarantees, the government will get $27 billion of preferred shares paying an 8% dividend, which is roughly the equivalent of a 4.5% stake in the company.

Elsewhere yesterday, the President-elect Barack Obama warned that the U.S economy is "trapped in a vicious cycle" and the faces the prospect of losing "millions of jobs" unless immediate steps are taken to stimulate the economy and rescue the nation's struggling automakers.

Obama was speaking at a press conference in Chicago and the tone of his statement was almost like a rallying cry or an ommission of the dire state of the economic outlook in the U.S as the President in waiting announced that the New York Fed President Timothy Geithner will be unveiled as the Treasury Secretary in the New Year.

In terms of economic data, the Dollar also came under further selling pressure following reports that existing home sales dropped in October and prices plunged by the most on record as the housing slump shows few signs of abating going into 2009.

Data Released 25th November

U.K 09:45 King, Bean Gieve, Bake and Sentence Testify on Inflation report

GER 07:00 Gross Domestic Product (Q3 Details)

GER 07:00 Gfk Consumer Confidence (December)

U.S 13:30 Gross Domestic Product (Q3 Revised)

U.S 14:00 Case Shiller House Prices (September)

U.S 15:00 Consumer Confidence (November)

written by Adam Solomon