What do the latest budget announcements mean for the pound? – Katar Investments

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What do the latest budget announcements mean for the pound?

We take a look at the changes being brought into effect regarding budget changes

In his budget speech, the Chancellor backed up Theresa May’s statement at the Conservative Party Conference last month that austerity is coming to an end. The claim has been disputed by Labour’s Shadow Chancellor, but “spreadsheet Phil,” as he is known in the government, focussed on the numbers, stating that a windfall from better tax receipts on the NHS, universal credits and income tax cuts. The currency market had little reaction to the budget, the focus remains firmly on Brexit, but we take a closer look at the numbers and the changes being brought into effect.

Focus on growth

The budget was designed to stimulate growth. As well as a £500m fund to aid preparations for Brexit, rate relief for small businesses and independent retailers and a reduction in the apprenticeship levy for SMEs were announced, all designed to boost growth. The Office of Budget Responsibility (OBR) upgraded growth forecasts in the coming years, with the 2019 forecast increased from the 1.3% announced in March to 1.6%. Subsequent years were upgraded or held steady, but with the caveat that this might change if a deal isn’t reached on Brexit.

Higher wages on the horizon

Wage growth was another focus of the budget. The planned increases to the 20% and 40% tax brackets were brought forward by a year to £12,500 and £50,000 respectively. This, together with OBR projects showing wage growth over the next five years and a drop in unemployment suggest that the average worker can expect a little more money in their pocket. These conditions may mean that the Bank of England will be bringing in further interest rate rises and this could be good news for the pound.

Budget deficit concerns

The OBR didn’t paint the same rosy picture as Hammond’s speech that focused on growth stimulation. Whilst he has a reputation for being careful, the Office of Budget Responsibility expressed some concern that the fiscal windfall was being spent on the NHS, rather than used to narrow the budget deficit. Firm conclusions are expected after next year’s autumn budget, after which Brexit can be completely factored in. They will be hoping that the economy will strengthen, putting pressure on the government to fulfil its promise and further increase spending.

What does this mean for the pound?

There are some positive indicators for sterling; the picture of growth and support for businesses to further stimulate that growth during the potentially rocky Brexit period if Britain fails to strike a satisfactory deal. If all goes to plan, interest rate rises may be on the horizon in line with wage rises and increased tax relief. The government may find more money in the coffers from announced measures such as a 2% tax levy on digital giants and tighter tax rules affecting private sector contractors which come into force next year. However, Brexit will continue to cast a large shadow. While fiscal policy looks set to remain stimulatory, analysts will be looking for a soft Brexit before the optimism found in current projections is reflected in the pound.

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