Busch: UK's Path The Road Forward?

Today, the United Kingdom's Finance Minister Alistair Darling release some bomb shells during his budget statement to Parliament.

Here are the fun facts:

"Alcohol duties will go up by 2 percent from midnight tonight. There will be an increase in tobacco duty of 2 percent from 6 pm tonight. Taken together, these measures will raise over 6 billion pounds by 2012."

"I will continue to monitor oil prices, but I expect that fuel duty will increase by 2 pence per litre in September, and then by 1 penny a litre above indexation each April for the next four years."

"As the economy recovers and wages start to grow again, it is right that we take additional steps. I believe that it is fair that those who have gained the most should contribute more. Only those with incomes over 100,000 pounds a year -- or 2 per cent of the population -- will be affected....In order to help pay for additional support for people now, I have decided that the new (top end) rate will be 50 per cent, and will come in from next April -- a year earlier."

"In November, I also announced that I was reducing personal allowances for the very highest earners with incomes over 100,000 pounds. These allowances are worth twice as much as those of basic-rate taxpayers. I have now decided to fully withdraw the benefit of that allowance for those with incomes over 100,000 pounds from next April."

"From April 2011, I will restrict pension tax relief for those with incomes over 150,000 pounds so it is gradually tapered to the same 20 per cent rate the majority of peoplereceive. We will consult on implementation."

Why all this revenue raising?

Massive borrowing to pay for government stimulus and bailout programs. "UK net debt, which includes the cost of stabilizing the banking system, will, as a share of GDP, increase from 59 percent this year, to 68 percent next, 74 percent in 2011-12, 78 percent and 79 percent in 2013-14."

The market reaction has been sharp and severe. The British pound has been aggressively sold on the announcement with a drop of 200 points in less than 30 minutes. The FTSE is dropping and UK bonds are falling as well.

Is this a glimpse into the future of the United States? Absolutely.

The US budget deficit is already at a record $957 billion for 2009 and the US Treasury is likely to expand new borrowing by over $2.3 trillion this fiscal year. With unemployment rapidly climbing and corporate profits in a free-fall, tax receipts are tanking.

The lesson from the UK is that surprises to the upside in the level of borrowing and the level of taxes are going to be the norm rather than the exception. By softening the blow now, we're going to cut off growth rates in the future through higher taxes and higher borrowing by the government that forces up interest rates.

This blocks the sun over those sprouting green shoots in the economy.


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Andrew Busch
Andrew Busch


Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter athttp://twitter.com/abusch .