Fiscal reaction in sterling: cautious approval

Above: Chancellor of the Exchequer Jeremy Hunt leaves 11 Downing Street to deliver his Autumn Statement to Parliament. Source: UK Government.

The pound was weaker after the UK government announced in its autumn statement that it would introduce further tax hikes and spending cuts which economists said would risk further slowing the already faltering economy in the UK. UK.

Chancellor Jeremy Hunt has told Parliament his spending and tax plans will mean the government will meet its target of shoreing up the country’s finances by £55billion; as a result, UK interest rates were to end up being “significantly lower”.

Hunt said his aim was to reduce the ratio of debt to growth over a five-year horizon as he tried to reassure markets that the government had rediscovered sound fiscal management.

Consolidation would be split equally between tax increases and spending savings.

“Markets appear mildly reassured by today’s statement despite a variety of policies that may prove unpopular, but one thing is clear, the economic backdrop remains negative, at least in the short term with an economy in recession and a variety of new policies that could impact earnings at all levels,” says Walid Koudmani, chief market analyst at online investment platform

Hunt sought to restore market confidence in the UK government following the volatility caused by his predecessor’s ‘mini-budget’ in September, and as noted in the Pound Sterling Live preview, this would be important for the pound.

He appears to have convinced the markets he has a credible plan as gilt yields are steady near their lowest levels since Sept. 20, meaning they remain close to where they were before the budget. unhappy with Liz Truss.

“There were few surprises – a strict, ‘kitchen sink’ budget had already been priced into the price of sterling, and bond markets tend to like austerity because it’s disinflationary,” says Giles Coghlan, chief market analyst at HYCM.

Despite the government’s return to fiscal credibility, the fundamental outlook for the UK economy, and therefore the pound, is challenging over the long term as the government raises taxes and cuts spending as a recession approaches, which means it has the potential to make a bad situation worse. .

“Deep recession looming. Years of austerity and weak investment. A high twin deficit that needs financing. no good reason to maintain an overweight position in the pound right now,” says Viraj Patel, analyst at Vanda Research.

The exchange rate between the pound and the euro is down a third of a percent on the day at 1.1433, the exchange rate between the pound and the dollar is down one percent at 1, 1800. Note that GBP/EUR offers the best signal as the dollar is up across the board (EUR/USD is down two-thirds of a percent on the day).

(It should be noted that global equity markets are in the red on Thursday, which is generally unfavorable for the Pound, so it is difficult to get a clear market signal. Nevertheless, if you are looking to protect or boost your payment, you can consider securing the current fare for future use, or set an order for your ideal fare when it is reached, more information can be found here.)

UK real GDP from OBR

The latest economic forecast from the Office for Budget Responsibility, released alongside the fall statement, confirms that a recession and rising unemployment lie ahead.

The forecast informed the Chancellor’s decisions and revealed that squeezed real incomes, rising interest rates and falling house prices are weighing on consumption and investment over the next few years.

This would send the economy into a recession of just over a year from the third quarter of 2022, with GDP falling by 2%.

Unemployment is expected to rise by 505,000 from 3.5% to a peak of 4.9% in the third quarter of 2024.

Looking at the details of Hunt’s announcements, we see the following:

tax increase

  • Personal tax thresholds will be maintained at current levels for another 2 years, until April 2028, to strengthen public finances.

“The Chancellor has announced an effective tax hike for all by freezing personal income tax thresholds. As the latest ONS data shows real wages have fallen by 2.6% over the year, we had hoped that the Chancellor would not implement this policy in the lower thresholds – as this will further squeeze budgets that are already at full capacity due to the cost of living crisis,” says Paula Bejarano Carbo, Associate Economist at NIESR.

  • The non-taxable capital gains allowance will increase in 2023-24 from £12,300 to £6,000 and again to £3,000 in 2024-25.
  • The tax-free dividend allowance will be reduced to £1,000 in 2023-24, then to £500 in 2024-25

“Entrepreneurs are being penalized by increased taxes on capital gains and dividends, and people who have invested diligently over the long term to build their financial resilience will no doubt feel unfairly swept away by this drain on profits,” says Susannah Streeter. , senior investment and market analyst at Hargreaves Lansdown.

  • From April 2023, the rate at which people pay the additional rate of income tax, charged at 45%, will increase from £150,000 to those earning over £125,140.
  • The tax on energy profits goes from 25% to 35% and will be extended
  • A new temporary tax of 45% on electricity producers is introduced
  • From 2025, a road tax will be introduced for electric vehicles
  • The stamp duty reductions announced in the growth plan will now be time-limited and will end on March 31, 2025

Spending cuts

There are no cuts, but the government will save money by continuing to increase spending in real terms every year for the next 5 years, but at a slower pace.

Headlines here include increasing the schools budget by £2.3bn next year and £2.3bn the following year, bringing the schools’ base budget to a total of 58, £8 billion.

Hunt also announced that no cuts would be made to planned infrastructure projects in the UK, including the progress of the Sizewell C nuclear power station, HS2 rail and other rail projects in the north of the country.

The government has also announced post-Brexit Solvency II reforms, which are expected to unlock tens of billions of pounds of investment by UK insurance companies. “The reforms will also cut red tape left behind by the EU and maintain high standards of customer protection,” Hunt said.

Triple Lock Pensions and Pension Credit will be protected and will increase in April 2023 by 10.1%.

Working-age benefits will rise in line with the rate of inflation at 10.1% and the ceiling for household benefits will be increased from April 2023. The Treasury estimates this will cost the government £11billion.

The NHS would meanwhile see a further £3.3billion coming in.

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