The marchaheadline-grabbing UK budget announcement last week brought unprecedented personal and economic updates to just about this. Earlier this month, the Office for Budget Responsibility (OBR) downgraded its average growth forecasts for the UK economy by 0.3 percentage points. This concurrent downgrade of expected growth along with a major reduction in expected productivity illustrates a very grim economic future. Yet, in spite of any of this, the pound has proven rather hardy in the short-term financial markets.
That the budget said so little about growth must be alarming to any economist, macro analyst or even cynic. The OBR’s revised outlook anticipates a decade where economic progress grinds to a halt. This is compounded by an additional £26 billion per year burden on taxpayers. This figure further compounds the £40 billion hit added last year, bringing even greater pressure on homes and businesses to bear.
A three-year extension to the freeze on income tax thresholds is projected to provide half of the new revenue. Unfortunately, such a move will probably not achieve real benefits you can see until 2028. As a result, the short-term effects of such tax increases are likely to outweigh any potential long-term economic-benefiting effects.
In response to these fiscal moves, financial markets are already expecting a cut by the Bank of England in December. Specifically, they are giving it a 92% chance of happening. The Chancellor’s decision to provide more than double the fiscal headroom compared to last year has contributed to the pound’s stable performance over recent trading sessions. Analysts largely credit this resilience to the lack of any surprises in the tax pronouncements. This relative stability appears to have calmed significant investor concern.
The new tax burdens will invariably have permanent negative impacts on future economic growth. This is where businesses and households start to experience the pernicious tentacles of that £26 billion burden. Such an increase in economic pressure may themselves begin to slow consumer spending and business investment. Political observers are convinced that sustained pressure from taxpayers can lead policymakers to reconsider their tax plans. They caution that possible election results would more directly shape these decisions.