News & Analysis

The Spring Budget contained no meaningful pre-election surprises, leaving the path clear for the BoE to cut rates this year, we think most likely starting in August.

A similar package of measures announced in the Autumn Statement was judged by Bank staff to add only marginally to inflation pressures, meaning that today’s announcement is unlikely to require a change of course on Threadneedle Street. Given this, the immediate reaction across markets has been muted. Gilt yields are marginally down on pre-announcement levels and sterling is trading broadly flat against both the dollar and the euro.

Of the few significant announcements today, the OBR did upgrade their GDP forecasts on net. They now predict GDP growth 0.8% this year and 1.9% in 2025, followed by growth of 2.2%, 1.8% and 1.7%  in 2026, ‘27 and ‘28 respectively. For comparison, they had expected UK growth to be just 0.7% this year, and 1.4% next year. Moreover, they also join the Bank of England in predicting that inflation will fall sharply in coming months, temporarily dipping below 2% before rebounding further out.

Even so, this largely left the constraints facing the Chancellor beyond 2025 looking broadly similar to the Autumn Statement, limiting the room for any fiscal giveaways.

In terms of what the Chancellor did deliver, the key takeaway from today’s event was a 2% cut to national insurance that had been widely trailed pre-announcement, alongside the broadly expected freezes to both fuel and alcohol duty increases. Combined with a reduction in the higher rate of property gains tax from 28% to 24%, the full expensing of leased assets and tweaks to the high income child benefit charge, this added up to a modest set of measures that might add some marginal extra capacity to the economy. These spending commitments were offset by the abolition of non-dom status, saving £2.7bn per year, but notably not a downwards adjustment to the growth in day-to-day spending post-election, which had been feared in some quarters.

All told, today’s long run spending plans still look fanciful to us, with post election spending plans continuing to look tight. The Chancellor is now only left with just £8.9 in headroom against his fiscal target of the debt-to-GDP ratio falling in five years’ time. This is down on November’s £13bn, and is the second smallest margin for error on record.

Given the lack of meaningful changes to the government’s tax and spending plans, markets were largely underwhelmed by today’s announcements. As, we suspect, are policymakers at the BoE given the lack of impact today’s measure will have on either growth or inflation. A similar package of measures announced in November was estimated by Bank staff to add 0.2-0.3% to aggregate demand, and produce only a modest upwards increase in price pressures. Indeed, the 4% cumulative reduction in National Insurance over the past two budgets was claimed by the Chancellor to have an impact equivalent to an extra 200,000 people in work and is expected to grow the economy by around 0.4%, suggesting any extra inflation pressures are likely to be marginal. We would, however, note that the stronger growth outlook and limited spending plans released by the government today raises the risk of another fiscal event before this year’s general election is called. Based on historical parliamentary recesses and election rules, this would likely place the UK general election into close proximity with the US presidential election in November.

For sterling, even though today’s budget proved to be a non-event, this would mean that politics is unlikely to be a secondary factor for much longer, with Q4 potentially set to be a turbulent time for GBPUSD specifically.

 

 

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