Pound dips as sombre growth forecasts overshadow UK tax cuts

UK chancellor of the exchequer Rishi Sunak announced Wednesday £9bn worth of measures aimed at helping working families, including a 5p-per-litre cut in fuel duty, but the financial markets were more concerned with weak growth forecasts as inflation soars.

Unveiling some sobering projections from the Office for Budget Responsibility (OBR) that see inflation averaging 7.4% this year and gross domestic product (GDP) growth slowing to 3.8% in 2022, and falling to 1.8% in 2023, Sunak admitted that public spending would be cut as the exchequer faces £83bn in debt interest payments this year.

The headline announcements were on tax, however, as the chancellor promised “security for working families”.

Sunak said that the basic rate of income tax would be lowered to 19p in the pound from 20p by the end of this parliament in 2024, while the threshold for paying National Insurance would rise to £12,570 from the current £9,570 from July.

Tax relief

He declined, however, to axe the scheduled rise in National Insurance by 1.25 percentage points, which some had expected.

Other tax relief measures announced included:

• Motorists: a 5p/litre cut in fuel duty as prices at the pump hit record highs this month – this will last until March 2023
• Energy efficiency: 0% VAT on energy saving materials such as solar panels, insulation, etc.
• Businesses: a research and development tax credit for companies promoting innovation and training; and lower tax rates on business investment – with details on both to be published at the Autumn Budget
• Small businesses: an employment allowance for small businesses increased to £5,000 per company

Reaction

Much of the reaction stemmed from the dour growth projections from the OBR, with GDP expected to slow to as low as 1.7% annually by 2026.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said there was little in the statement to cheer markets, nor to steer the Bank of England from its current path of monetary policy.

He said: “The Spring Statement likely will not force the MPC [monetary policy committee] to revise its view that it needs to increase the Bank Rate only modestly this year and by significantly less than markets currently envisage.”

Jane Foley, senior forex strategist at Rabobank, agreed that markets were overpricing the number of interest rate hikes this year, and that the pound would remain under pressure – particularly against the US dollar.

She said: “Money market pricing appears to reflect the trajectory of inflation forecasts rather than the detrimental impact the higher cost of living is set to have on growth.”

The pound, which was already lower ahead of the statement, was down 0.7% in mid-afternoon trade in London at $1.3178 against the dollar, even as the annual rate of headline inflation was reported by the Office for National Statistics to have risen to 6.2% in February.

The Bank of England said last week that it expected inflation to peak at around 8% in the second quarter.

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