City spotlight on Labour's challenges

THE City was today set to take Labour's greatly reduced majority in its stride as the focus shifted to tax rises and the economic challenges faced by the new Government.

As the Square Mile digested the result, analysts said it would have to tackle a host of problems, including the £1 trillion consumer debt mountain, massive public borrowing, the pensions crisis and next year's vote on the European constitution.

The challenges come as fears about the economic outlook are growing. High Street spending is faltering and the manufacturing recovery has stalled. City bookies predicted the FTSE 100 would open two points lower at 4900. Sterling was steady.

John Butler at HSBC said: 'Labour faces a tougher economic environment and some major economic headwinds. The consumer looks to be running out of steam, and it seems that the long-awaited cavalry, in the form of a strong global economy, has already come and gone. The economic outlook could swing from being a golden egg to a poisoned chalice.'

Jonathan Loynes at Capital Economics said Labour's victory meant taxes were likely to start rising by about £10bn a year in the next Budget.

'Perhaps the key effect is to support our expectation of a tightening of fiscal policy, offset by looser monetary policy,' he said. 'This points to the scope for market interest rates and bond yields to fall significantly further over the next year or so, as well as a weaker exchange rate.'

There was a boost for Gordon Brown from a new survey showing consumer confidence in the capital rose in the first quarter, as Londoners felt more positive about their finances and less worried about a house price crash or further rises in interest rates.

However, the Experian report also showed sentiment remains cautious, and Londoners are less likely to splash out this year.