The brutal truth

17 May 2010 By Ian Campbell

George Osborne says the UK finances are in even worse shape than thought. A new fiscal watchdog will tell him just how bad things are giving scope for brutal cuts. At least the problem is being tackled, the gilt market will probably think. But the mediumrun risks look big.

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The UK's new chancellor of the exchequer is to create an independent fiscal watchdog with responsibility for economic forecasts, having accused the former government of "fixing" the figures.

George Osborne told the Financial Times that the new coalition government was finding "all sorts of skeletons in various cupboards".

His proposed Office for Budget Responsibility will be headed on an interim basis by Sir Alan Budd, a former chief economic adviser to the Treasury.

Osborne is to unveil an emergency Budget on June 22.

The Bank of England warned on May 12 that the downside risks to UK growth "have increased somewhat," reflecting the prospect of fiscal consolidation in "a range of countries".

Mervyn King, the Bank of England Governor, said that it was "imperative" that the UK's fiscal problems are "dealt with sooner rather than later".

The yield on 10year UK government bonds, commonly called gilts, dropped by 3 basis points to 3.83 percent on May 13. The spread against German bunds of comparable maturity narrowed to 88 basis points from 90 basis points on May 12.

The UK's new coalition government cut government ministers' pay by five percent on May 13 and said that ministerial salaries would subsequently be frozen for the fiveyear lifetime of the Parliament.

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