Earlier in the week we highlighted the financial market’s positive yet muted reaction to the UK budget announcements made over the weekend. The lack of decisive reaction despite the salience of fiscal policy to exchange rates was put down to the risk of yesterday’s budget announcement striking a different tone to that which the Chancellor projected over the weekend. The devil was deemed to be in the details of how the composition of the spending pledges announced by the Chancellor would be deployed and over what time frame. It was also critical for markets as well as the public to see what proportion of the fiscal pledges were new spending allocations and how, if any, capital was to be raised to fund the projects. Following PMQs yesterday, the Chancellor spoke before the House of Commons and despite GBP remaining within recent ranges, the reaction in Sterling backed-assets showed confidence in the UK economy.
The multibillion-pound spending pledges, focussed on the supply-side of the economy, showed a consistency to the announcements made public over the weekend. Despite the Chancellor’s occasionally emotive words on the moral duty to adopt fiscal responsibility, there remained concerns over the potential impacts of a spending deficit whilst fiscal support and their antiparticle tax cuts were declared at the dispatch box. The level of inflation (and for that matter unanchored inflation expectations) continues to concern consumers and markets. The Chancellor’s words served to do little to convince the House and likely the public to curtail their fears surrounding inflation.
The credibility and inflation risks that the Chancellor is inviting as he reshapes fiscal policy to fit the post-Covid-era are critical. Due to the amount of debt amassed and persistent fragility in the UK’s growth and inflation outlook, there is the possibility for UK government debt financing to grow increasingly expensive and create a destructive cycle that undermines the potency of public spending. Perhaps the Chancellor was planning for a toast to his budget as he scrapped the planned duty hikes on many alcohol products. Do tell us what you made of the budget. For now, one thing remains for sure: the Chancellor, who doesn’t himself drink alcohol, shan’t be raising a glass to the success of this budget any time soon.
Discussion and Analysis by Charles Porter