UK Proposes Sharp Budget Cuts

Darlington Musarurwa
20 Oct, 2010
New York City

The UK indexes traded sideways after Chancellor Osborne unveiled significant budget cuts that will also see a reduction in nearly half a million public sector jobs. The BoE policy makers were divided on quantitative easing in the latest meeting.

[R]4:30 PM London – The UK indexes traded sideways after Chancellor Osborne unveiled significant budget cuts and eliminate nearly half a million public sector jobs. The BoE policy makers were divided on quantitative easing in the latest meeting.[/R]

Rio Tinto agreed to invest $3.1 billion to expand Pilbara iron ore capacity in the Western Australia region.

In London, FTSE 100 Index traded higher 17.08 or 0.30% to 5,720.97 and the pound edged higher to close at $1.584.

Chancellor of the Exchequer George Osborne unveiled details of the Comprehensive Spending Review to the Parliament today. The spending cuts were widespread as the nation struggles with one of the highest debts of among developed nations.

Chancellor also proposed to cut nearly 490,000 public sector jobs over the four years and public spending will be slashed by £83 billion by 2015. UK is facing annual budget deficit of £156 billion or nearly 10.4% of its economic output.

The proposal includes among other cuts, 8% spending cut in defense outlay by 2014, 4% cut in police and average cut for various government department will be 19%, lower than the previously proposed 25%.

Capital spending will be £51 billion next year, and finally £47 billion in 2014-15. That is around £2 billion a year higher than what was originally set in the emergency budget in June. And, the current expenditure is estimated to reach £693 billion in 2014-15.

Total public expenditure, including both capital and current, will be £702 billion next year and increase in successive years to to £713 billion, to £724 billion and to £740 billion in the fiscal year 2014-15, according to Osborne.

Further, the state pension age for men and women will be raised to 66 by the year 2020, four years earlier than previously expected, the Chancellor announced.

Osborne said the debt interest will be reduced by more than £5 billion by 2015 and UK deficit that stands at 10.1% in the current fiscal year is estimated to drop to 2.1% in the fiscal yearn 2014-15.

Policy makers of the Bank of England left key interest rate unchanged and maintained the size of quantitative easing at £200 billion by a split vote in October, the minutes of the meeting showed Wednesday. The meeting was held on October 6 and 7.

Seven members of the Monetary Policy Committee including the Governor Mervyn King, voted in favor of the proposition to leave the key rate unchanged and maintain the size of quantitative easing.

Adam Posen and Andrew Sentance voted against the proposition. Posen sought an increase the size of the asset purchase program by £50 billion to a total of £250 billion, while preferring to maintain the key rate.

Sentance, on the other hand, preferred an increase in key rate by 25 basis points and to maintain the size of the asset purchase program at £200 billion.

The UK M4 money supply decreased by a seasonally adjusted 0.3% in September, compared to a decline of 0.2% in August, according to preliminary data from the Bank of England released today.

Annually, the M4 money supply grew 0.9% in September, as against a 1.9% rise in August.

The UK's public sector net borrowing, excluding the effects of financial interventions, totaled £16.2 billion in September, up from £15.5 billion in the same month a year ago, the Office for National Statistics said today.

The UK gross mortgage lending fell 1% on a monthly basis to £12 billion in September, the lowest total for the month since 2000, the Council for Mortgage Lenders said today. In the third quarter, gross lending was £37.4 billion, up 9% from the second quarter.

Rio Tinto plc, the British-Australian miner approved a $3.1 billion for expansion of Pilbara iron ore capacity. The company said that this expansion will support port and rail infrastructure works around Cape Lambert in Australia.

Rio Tinto said this investment will increase annual infrastructure capacity to 283 million tons during 2013.

Gainers & Losers

Dana Petroleum plc dipped 0.06% to 1,799.00 pence after the independent oil company, which is being acquired by Korea National Oil Corp. in a hostile takeover, said that its Chief Executive Officer Tom Cross will resign on November 8.

Home Retail Group Plc fell 2.50% to 214.40 pence after the home and general merchandise retailer stated first-half revenue decreased 3% to £2.720 billion from £2.805 billion in the prior year, with declines in Argos as well as Homebase. Profit for the period declined 3.9% to £74.7 million or 8.7 pence per share from £77.7 million or 8.9 pence per share in the prior year.

Hochschild Mining Plc declined 1.45% to 477.30 pence after the underground precious metals producer announced third quarter silver production was 6,227 koz, lower than 6,668 koz in the prior-year quarter. Gold production for the three-month period was 48.53 koz, compared to 56.80 koz last year.

Sports Direct International Plc dropped 2.51% to 143.80 pence after the company said group total sales for the nine weeks ending September 26 rose 5.4% to £295 million from £280 million last year. Gross profit for the period increased 5.4% to £117 million from £111 million in the previous year.

Tandem Group PLC edged lower 1.93% to 152.50 pence after the sports and leisure equipment designer said first-half revenue grew 0.6% to £19.06 million from £18.95 million in the comparable period last year. Pre-tax profit in the period advanced 18.5% to £648,000 from £547,000 in the past year.

Uniq plc gained 2.14% to 7.15 pence after the food manufacturer in its Interim statement for the third quarter said group sales rose 9.9% in the quarter reflecting new business wins at the end of 2009 and the successful launch of new products during 2010. Year to date sales increased 8.1% on the same period last year.