In what was perhaps the most leaked budget in history, the Conservative Chancellor George Osborne released a series of cuts and tax rises which add up to the biggest public spending cuts seen in a generation.

However given the headlines and government statements made since the General Election, most pundits are looking on the emergency budget as ‘not that bad’. The main tax rise 2.5% on VAT was widely anticipated and came as no shock when the Chancellor announced it.

Capital Gains Tax has been increased to 28% for top rate tax payers up from 18%, however it was expected to rise to 40% or more.

As expected, the UK has announced a tax on banks which will raise up to £2.4 billion per year after 2011. Banks will pay a tax based on how much they finance their assets by borrowing. This tax is likely to favour prudent banks like HSBC which rely on customer deposits at the expense of banks such as RBS and Barclays who rely heavily on interbank lending.

In trading, Lloyds Group shares rose on the news while RBS shares held steady.

The biggest area of controversy that has come out of the budget is likely to be the size and breadth of government spending cuts.

The Chancellor is seeking to reduce government spending by some 25% over the next 5 years. The only departments to be spared from this are the NHS and strangely International Development aid. While spending reviews to be conducted later will announce the majority of these cuts, first on the chopping block are state benefits.

The Chancellor announced that state benefits - except pensions - will now increase by the Consumer Price Index (CPI) as opposed to the Retail Price Index (RPI). Currently CPI is 2.5% versus 5.15% for RPI. CPI does not include rises in house prices and mortgage payments.

People claiming Disability Living Allowance (DLA) will now be subject to a more stringent medical exam after 2013. These moves are expected to save around £11 billion a year in 5 years.

In total, the announced spending cuts and tax rises should wipe £120 billion off the UK’s budget deficit over the next 5 years.

Bond and currency markets reacted well to the news with sterling rising and GILT yields falling. Fitch has indicated that the plans should be enough for the UK to maintain its AAA credit rating. The price of insuring UK government bonds fell by 10 basis points.

What remains to be seen is how Unions and the Civil Service will react. All public workers earning in excess of £21,000 a year will have their pay frozen at current levels for the next 2 years.

All in all our view is that the government has taken the right steps. With the UK likely to so be paying £70 billion a year in bond interest payments action had to be taken. The budget seems to be putting more emphasis on cutting spending especially in areas such as benefits which contribute little to economic growth. The tax on banks’ balance sheets also seems a relatively fair measure. Fears on the damage of this to the City of London’s competitiveness are likely to fall away especially when the US, Germany and France have all committed to the same measure and are likely to charge double what the UK is.