Morning Brief – Chancellor’s Treat

Chancellor’s Treat

There have been mixed reactions to Chancellor Rishi Sunak’s latest spending plans. Those reactions, of course, have been driven by each individual’s own stakes and thus rewards from the spending decisions made. The Chancellor even received condemnation from the Speaker of the House of Commons for swerving parliamentary procedure and declaring most of Wednesday’s budget to the British public before Parliament. The currency markets of course paid their own close attention to the budget and a look at GBP price action since the details became public do not reveal a huge reaction.

One of the reasons for the limited reaction is that despite the headline spending pledges dropping prematurely onto newspaper headlines, the details of the budget remain obscure. The Chancellor will be expected to provide more clarity to the House tomorrow and it is therefore possible we see a stronger reaction in GBP over subsequent trading sessions. So far, the Chancellor looks to have positioned the UK economy in line with many other developed economies emerging from the pandemic with a focus upon supply side, including labour, investment and improvements.

With inflation and it’s underlying expectations already proving to be less well anchored than we have been accustomed to, the Chancellor faced the unenviable challenge of balancing much needed fiscal support with the risk of driving prices higher still by over spending. The bill for those spending pledges announced over the weekend totals £23.1bn which on the face of it may sound like a lot. However it remains unclear how much of that spending is new capital spending or merely the materialisation of previously allocated spending plans, redeclared. It is not even guaranteed that amongst the theatrics of the Commons this information will be presented on Wednesday leaving markets guessing about the UK’s fiscal stance as we exit the pandemic.

We have spoken previously about how supply side investments, most notably with reference to the infrastructure bill in the US, need not prove to be inflationary if managed responsibly. Markets are most likely to therefore welcome a budget tomorrow that proves to be as generous as the Chancellor had intended it to come across at the weekend with new capital to deploy on supply side upgrades.

Discussion and Analysis by Charles Porter

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