The budget could have been harsher, but no one is really sure how.  George Osborne raised taxes, cut spending and promised more pain.  There are departmental budget cuts of 25% that are being talked about and there is a lot of shock across the political class.

The first thing to remember about the budget is that this was not in the script during the election.  The Conservatives started talking about austerity but lost a large lead in the polls because of it.  The Liberal Democrats agreed with Labour that while there should be some spending cuts, they didn’t need to be as sharp or as soon as the Conservatives were suggesting.  And even if the party manifestos talked about the need for some belt tightening, the election campaign was dominated by promises of higher spending and tax reductions, although admittedly they were far fewer than in previous elections.

The public do not seem to accept that cutting the deficit involves real choices that will affect them, although this does seem to be changing.

So why are the government trying it?  Well firstly the Labour Party is in disarray.  Although Labour did far better than expected (although we called it) they realise that they have been roundly rejected and they are currently in a fight for the leadership.

There is also a distinct lack of rebellion on the Common’s benches.  The Liberals are surprised to be in government, and the Conservatives are amazed to be there at all, 47% of Conservative MPs are new.

The budget is going to be cut faster than Labour would have done it, but it is not going to be cut as fast as they are claiming that it will be.  Political reality dictates that they have put the most electorally painful measures first – unless they are forced by the markets.

This probably means that sterling is overvalued, that future interest rates are going to be higher than the market is predicting and that dividends are likely to be higher.  So going long on the FTSE and short on the pound may be a good idea.