Richard Hunter, head of UK equities, Hargreaves Lansdown, 14/04/2009 00:00

Can Darling rescue the FTSE?

With the Budget a little over a week away, what noises could the chancellor make to help improve investor confidence?

Whatever the outcome of the speech, the chancellor will have his detractors. Indeed, in much the same way as he was castigated last year for talking the economy down (when he stated that the situation was the worst for 60 years), he will come up against criticism for being overly bullish this time round.

Have your say: Budget 2009

The markets aren't anticipating much from the Budget. The state of the nation's finances, following the various bank and auto industry bailouts, along with the quantitative easing programme, has already been well covered and is clearly a longer term problem which at some point will need to be partly financed through higher taxes.

When these higher taxes may begin to be implemented will be decided partly for economic reasons, but also for political reasons. And let's not forget the likelihood of higher interest rates if the quantitative easing programme has the desired effect.

Neither of those measures will endear Labour to the voters, With an election less than a year away this would be taken into account in the Budget, assuming of course, the damage is not already irretrievable.

Wooing the savers
With this in mind, the government may have been thinking about ways to woo back the saver. With interest rates at an all-time low, saving rates have been dramatically reduced, to the extent that at the current time they are barely keeping pace with inflation.

The populist view that the very people who have been careful and supposedly prudent with their spare capital should be undone by the profligacy of others is one which the chancellor will find difficult to avoid. As such, an increase in the ISA savings threshold above the current £7,200 may begin to repair some of the damage.

For those already invested, some kind of relaxation of the capital gains tax regime could be of benefit.

Meanwhile, the housing market has still not found a state of equilibrium. As such, the government may consider ways to kick-start this moribund market, with measures ranging from incentives for first-time buyers to the ongoing push for the very availability of such mortgages.

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There have already been calls for the extension of the VAT cut to 15% from 17.5%, which is due to expire at the end of this year. According to a recent study by the Centre for Economics and Business Research, the cut has led to more than £2 billion of extra sales since its introduction in December 2008.

This level of stimulus cannot be guaranteed to continue, it has clearly had an impact during a particularly difficult economic time.

Balancing the books
Of course, all of these measures would further unbalance the government's books in terms of tax income at a time when it can ill-afford them. There are also those who suspect, for example, that not only is an extension to the VAT cut is unlikely, but it could actually be increased to as much as 19.5% next year.

Tax company Smith & Williamson estimate that even a VAT hike to 18% would bring in an additional £2.5 billion per year to the government. The company also notes that the UK's VAT rate is currently the lowest in Europe.

The Budget is likely to contain a number of precautionary, perhaps even stringent, cuts on expenditure. The chancellor has already conceded that his pre-Budget report was wrong in its projections, whilst the International Monetary Fund recently suggested that the UK economy will retract nearly 4% this year alone.

Missing the silver bullet
For the market, it is plain that the problems of the economy are largely skewed towards the longer term and that there is certainly no silver bullet in the short term to turn matters around.

With some very tentative signs of improving fortunes in the wider global economy, perhaps the best outcome would be some well considered actions as to how the deficit will be reduced in the UK, whilst keeping the lid on unemployment and highlighting any recent signs of a UK turnaround.

Even that would be a tall order in the current environment, so the Budget could yet prove to be a damage limitation exercise in credibility protection.