Markets want clear time-limit for fiscal stimulus

By David Milliken

LONDON (Reuters) - Financial markets want a clear time-limit for any tax cuts or extra spending pledges in the pre-budget report on Monday.

Prime Minister Gordon Brown has been saying for weeks that higher government borrowing to support the economy is the best way to brace the country against a sharp slowdown.

Economists expect any stimulus package to inject at least 15 billion pounds into the economy, in line with a likely European Commission call for stimulus equivalent to 1 percent of GDP. The IMF has called for 2 percent.

But the government will have to present clear plans for how it will rein back spending or raise taxes once the worst of the crisis is over, or sterling risks weakening further and the interest it pays on new debt may rise.

"A large fiscal expansion that is not accompanied by a robust and credible framework for medium term fiscal discipline can get a punishing response from the markets. The risk premia on UK assets could widen, yields jump higher and sterling depreciates sharply," said Amit Kara, an economist at UBS.

The economic slowdown and existing government finance pledges mean the IMF forecasts that Britain will run a budget deficit of over 3 percent this year and over 4 percent in 2009, more than any G7 country apart from the United States.

Demand at government gilt auctions has sagged in recent months as borrowing racks up to fund the recapitalisation of high-street banks, and sterling has fallen by almost a quarter on a trade-weighted basis since the start of the year.

GETTING AWAY WITH IT?