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Saturday, January 28, 2023

UK budget brings back weak economic fundamentals to traders

While the announced measures are largely in line with those that were communicated to market participants this week, overall consolidation efforts appear to lag far behind initially suggested measures as many support measures for the economy are needed in the short term. was also announced. The announced deficit reduction measures have mainly focused on raising tax revenue in the short term, while limiting public expenditure growth in the period following the five-year projection. Some of the main measures announced are:

tax hike

Fiscal drag: Personal subsidies and other fiscal limits (income tax, Social Security, inheritance) will remain constant through 2028. Due to the growth of the economy and increase in wages, a large number of people will fall into higher tax brackets. Lowering the upper income limit from £150,000 to £125,104 is expected to raise a combined £14bn.

– The capital gains tax-free limit has been reduced from £12,300 to £6,000 in 2023 and £3,000 the following year.

The tax deduction on documentary legal acts will continue till 2025 and will be extended thereafter.

– Dividend relief will be reduced from £2,000 to £1,000 the following year, and back to £500 the following year.

The tax on windfall gains will increase from 25% to 35% and will be extended from 2026 to 2028, beginning January 1, 2023.

low public spending

Amending the Basic Energy Price Guarantee, so that it is increased from the current level of £2,500 to £3,000 from 1 April for the remaining 12 months of the scheme. A payment of £900 to resource benefit recipients and £300 to pensioners.

– Reducing the aid budget from 0.7% to 0.5% of GDP.

– Limitation of increase in social benefits up to 7% per annum.

Despite the series of measures announced in today’s Budget, the economic outlook has had very limited lasting impact on sterling assets. Although the announcement of the OBR’s gloomy economic projections initially sent the pound down around 1 percentage point – as gilt yields rose – the first day’s move was soon reversed as consolidation measures took hold.

The main takeaway from today’s budget is that it has revealed a tendency for traders to sell the pound at current levels. While this bias was already visible this morning, it came into sharp focus as the OBR estimates reiterated weak UK economic fundamentals. We are inclined to fade the recent rally in the pound towards 1.15. After the budget, aggressive comments from FOMC member James Bullard extended sterling’s losses below 1.18, while the broader dollar began to rally from its recent lows. The subsequent fall of the pound should not be linked to any budgetary implications.

OBR Estimates:

– Growth: 4.2% in 2022, -1.4% in 2023, 1.3% in 2024, 2.6% in 2025 and 2.7% in 2026.

– CPI: Inflation will reach a 40-year high of 11% this quarter before falling sharply next year, mainly to 7.4% in the second half. A decline in energy and food prices will pull inflation down to near zero in the middle of the decade, before returning to 2% in 2027.

Unemployment: Unemployment is expected to increase by 505,000 people in the third quarter of 2024, going from 3.5% to a maximum of 4.9%.

– Deficit: continues to fall to 5.7% in 2021, 7.1% in 2022, 5.5% in 2023 and 2.4% in 2027-28.

World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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