Pre-Budget Report

I have to make a little progress or there will not be any time left for the rest of the debate. If the Chancellor was in any doubt about the market reaction after the pre-Budget report and the immediate reactions to it, he should be in absolutely no doubt now. The UK 10-year gilt spread against the German bund, which is the benchmark, has widened alarmingly since the pre-Budget report. In less than a month, there has been an 18 per cent. rise in the spread—up to 62 basis points—and a rise of one third of a per cent. in the cost of servicing our national debt. The Government now need to find £5 billion more in spending cuts to balance the books than they did on the day that the Chancellor stood up to deliver his pre-Budget report. At the end of 2008, the cost of insuring UK gilts against default was twice as expensive as the cost of insuring McDonald's corporate debt. At the time, a Government spokesman said that there was "obviously something odd" going on in the credit default swap market. Perhaps it was not so obvious—a year later, credit default swaps on 10-year Government bonds still trade at a 70 per cent. premium compared with those on 10-year McDonald's bonds. Nearly half the economists polled by the Financial Times in a new year study cited the fiscal crisis as a key threat to the economy. We have already heard about the statement from PIMCO. Not only does it expect a credit rating downgrade, which it says is more than 80 per cent. likely, but it has announced that it will reduce its holding of UK Government bonds during the coming year. There might be all sorts of reasons why PIMCO has chosen to reduce its holding of UK Government bonds, but even the Chief Secretary would have to concede that it is not particularly helpful at a time when a country needs to issue £200 billion of new bonds over the course of a year to have the world's biggest holder of Government bonds saying that it intends to reduce its holding of that Government's paper.