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Alistair Darling backtracks on budget promises

As we approach the next general election, Alistair Darling will next week set out his plans to reduce the UK budget deficit which is now estimated to top £175 billion for 2009. In what many will see as a political budget rather than an economic budget, ahead of the election, he is set to increase taxes on the middle to high income classes of the UK and will keep the tap turned on for various fiscal stimulus programs, in the short term at least.

However, while he may believe this particular strategy will appeal to UK voters it is already causing problems within the financial industry with financial experts concerned that Mr Darling has no idea how to cut the UK budget deficit in the short term. In a move which will concern many people, the government's early promise to reduce the budget deficit by 50% in the short term will be pushed back to a move to reduce the budget deficit by 50% in four years.

While it is unlikely that the credit rating agencies will reduce the credit rating of the UK sovereign debt, the government is well aware that many credit rating agencies are monitoring the UK situation very closely with concern. If the budget deficit is not reduced in the short term and indeed we see a further lurch downwards in the UK economy in 2010 then this is when the real trouble will start.

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