UK Budget News: How Will Markets React?
The FTSE 100 index was little moved after Philip Hammond, the Chancellor of the Exchequer delivered his budget address. At the close of the day, the FTSE 100 index was trading at 7334.61, down 0.06% or 4.38 points. The all-share UK index remains 19.74% in the black over the past 1 year. Meanwhile, the beleaguered GBP is trading at 7-week lows against the greenback, with no discernible reaction to the budget speech. In his address, Hammond alluded to improved economic prospects, but cautioned against complacency. UK economic growth projections had a muted effect on currency traders and stock traders on the day.
OBR Anticipates Modest Improvements in GDP Growth
The GBP/USD pair traded at 1.2164 immediately after the speech, after hitting a 7-week a low earlier in the day. That the GBP/USD pair is beneath the critical 1.22 level is significant. The current exchange rate is inching closer towards the 52-week low of 1.145. The 1-year high of 1.5018 was reached prior to the June 23 Brexit referendum. Philip Hammond indicated stronger GDP growth in the UK economy, at a rate of 2% over the next year, up from the current figure of 1.4%. However, the Office for Budget Responsibility is anticipating lower growth in 2018/19, with a figure of 1.6%. Further ahead, the UK economy is likely to grow at 1.7% in 2019/20, and 1.9% in 2020/21.
Key Takeaways from the Spring Budget Address
This Spring Budget was particularly worrisome for self-employed individuals. According to Hammond, national insurance contributions would rise for some 2.5 million people, despite a pledge to tighten the UK economy. The short-term growth prospects for the UK economy remain solid, however it’s the post-Brexit concerns that are troubling. For the current year, private investment contributes the most to GDP growth, followed by private consumption and total government investment. In 2018, this mix will shift to increased private consumption, decreased private investment and decreased total government expenditure. By 2019, private consumption will constitute the largest portion of GDP growth, followed by private investment and to a lesser degree government expenditure.
Public-sector forecasts for net borrowing have been revised sharply lower for 2016/17. The current figures indicate public borrowing of £51.7 billion, down from the previously forecast figure of £68.2 billion. Public borrowing is also slated to be revised lower from 2017/18 through 2021/22. Of concern to the corporate sector is the tax-free allowance on dividends. As from April 2018 the tax-free allowance will only be on £2,000, down from the current level of £5,000. Self-employed people are going to bear the brunt of the new budget. Hammond said that it was unfair that salaried employees paid far more than self-employed people. To this end, he proposed a tax increase to 11% within the next 2 years.
Sugar Tax to Fund Education in the UK
Individuals who transfer their pensions offshore will now face a 25% tax charge as from March 9, 2017. As for small businesses, there are 3 key takeaways. The local government will have access to £300 million in discretionary funds for individual hard cases, pubs will have a £1,000 discount if their value is less than £100,000, and all small businesses enjoying rate relief will not have their costs increased by more than £50 per month. However, the banking industry will be squeezed by the new budget and an extra £2 billion will be allocated towards adult social care in England. The sugar tax will now be £0.18 – £0.24 per liter and all proceeds will then be directed to the Department of Education for the purposes of funding children’s sport.
Overall, the GBP has stabilized after slumping precipitously in 2016. It is likely to fall further after Wednesday’s Fed decision to raise US interest rates by 25-basis points. Further, ongoing Brexit negotiations will place new pressures on the GBP and we are likely to see the 31-year lows revisited in the near future.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.