Although the Chancellor's message for the electorate will be along the lines of 'only the Conservative party can keep tight control of public spending, and so provide prudent tax cuts', the markets will be more concerned with the feasibility of his financial plans and his forecasts for the PSBR. In last year's budget he predicted a PSBR of £21.5bn in 1995/96 falling to £13bn in 1996/97. The outturn for this year now looks like being closer to £28bn and the forecast for 1996/97 will have to be raised too. Anything much over £20bn is likely to be taken badly.
The budget is expected to pave the way for a cut in base rates in either December or January. The prospect of an early cut in UK interest rates would be enhanced if the Bundesbank cut its official rates on Thursday. This is not widely expected, but given the rapid weakening of the German economy in recent months, and the Bundesbank's preference for surprising the markets, it cannot be ruled out.