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The pound has inched up to a one-month high against the US dollar, as City traders react to yesterday’s budget announcement.
Sterling traded as high as $1.3268 early this morning, the highest since 29 October, adding to yesterday’s gains.
Taking the chance offered by a helpful official forecast to avoid hard decisions has increased the Chancellor’s and Prime Minister’s chance of political survival.
The fall in yields and strengthening of the pound is probably more due to the waning of political risk rather than any changes to official forecasts or the policy package.”
Today’s Budget locks in a high-tax, high-debt steady state in a world of low productivity growth and higher interest rates. Even the historically large tax share of GDP now planned is only just enough to stabilise – not reduce – a debt ratio stuck around 100 per cent of GDP for the foreseeable future.
Macroeconomically, the Budget implies a modest fiscal tightening over the forecast. Fiscal policy shifts from being a tailwind to a headwind for growth. Inflation is expected to be 0.3 pp lower over the next year, reflecting energy-related measures and the fuel duty freeze extension. The key question is whether the Bank of England chooses to look through this price effect or views it as altering the underlying inflation profile.
Distributionally, the extension of the income tax threshold freeze to 2030 will fall disproportionately on the bottom half of the income distribution.
Despite being the second Budget of this government’s term, there was a notable lack of economic vision beyond clearing fiscal hurdles. Reforms to the triple lock, council tax, and VAT were pushed into the background while the Chancellor focused – justifiably – on meeting the fiscal rules. Even then, the £22bn of fiscal headroom is not large, and the probability of meeting the fiscal rules remains, in essence, a coin toss.
