The pound fell on Wednesday despite the UK budget statement, which was in line with expectations. There was no indication that Chancellor of the Exchequer Rishi Sunak’s budget announcement contributed to the market movement. The fall is possibly linked to a drop in the yield of long-duration UK government bonds and shows that markets expect the government to reduce borrowing in the coming years.

2021 Budget

In general, news about today’s budget statement was positive about the economic outlook, regardless of the fact that there was no fiscal stimulus announced. Sunak, said he had asked the Bank of England to remain committed to controlling inflation and keeping it low and stable, as anything above 2.0% will not be favourable in the long term. Next Thursday, with the Bank of England meeting, pound volatility will be expected.  

Rishi Sunak said that his budget delivers a stronger economy, stronger growth, public finances and employment, so that it is possible to begin building the economy post-pandemic. As he noted: “Let there be no doubt: our plan is working.”

Growth

Sunak said overall spending will increase by £150 billion, the "largest increase in a century", as the economy is expected to grow and expand 6% in 2022. The chancellor said that forecasts from the Office for Budget Responsibility (OBR) show the economy will grow by 6.5% this year, 6% next year, 2.1% in 2023, 1.3% in 2024, and 1.6% in 2025. Unemployment is forecast to reach 5.2%, down from a forecast of 12% last year.

Inflation

The chancellor said inflationary pressures are currently impacting on the UK economy and the government will make sure to support households. The Office for Budget Responsibility (OBR) is expecting inflation to be around 4% next year.

Borrowing

Sunak said that will set new “fiscal rules” for public finances. During “normal times” the state should only borrow to invest in growth while balancing everyday spending. In the current financial year 2021-22, borrowing will be 7.9% of GDP, and will fall to 3.3% in 2022.

Employment and skills

The chancellor said the government will raise government spending on skills and training by £3.8bn. The government will create a UK-wide numeracy service called Multiply to help 500,000 adults. This is part of the government’s commitment to improving lifelong learning and productivity. While a lot of this has already been announced, the 43% increase in spending is considerable.

Business taxes

The bank surcharge will be cut from 8% to 3%. Business rates will be changed to help companies and a new 12-month relief will be provided to companies to invest in their premises. The incentives are worth £750m. Sunak said that 2022’s intended increase in the business rates multiplier will be terminated. There will also be a 50% business rate discount for companies in retail, hospitality and leisure. The cut is worth £1.7bn. The chancellor highlighted that “This is the biggest single year tax cut to business rates in over 30 years.”

Taxation and universal credit

Sunak also announced that the taper rate in universal credit will be cut from 63p to 55p. This will be worth more than £2bn. The work allowance will be increased by £500.  In regards to taxes, Sunak confirmed: “By the end of this parliament I want taxes to be going down, not up.”

The reforms to the universal credit system will enable only those in work to keep more of what they own and will encourage employment.

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Pound Falls after Weak UK Data

Sterling has fallen after the release of weak UK data, and is trading lower against both the dollar and the euro. The fall comes after yesterday’s gains when the pound reached the highest level since spring 2008.

UK retail sales in 2020 post record fall

Despite expectations for a 1.2% gain, retail sales volumes in the UK rose by just 0.3% in December from January, according to data from the Office for National Statistics released on Friday. Clothing sales rose 21.5% after a 19.6% drop in November. In 2020, retail sales fell by 1.9% when compared with 2019, due to the coronavirus lockdowns. On the other hand, online and mail order sales rose 32% in 2020. Clothing stores, petrol stations and department stores recorded significant falls in sales volumes when compared to 2019.

Jonathan Athow, deputy national statistician for Economic Statistics, said: “December’s retail sales increased slightly, driven by an improved month for clothing sales, as the easing of some lockdown measures for parts of the month meant more stores were able to open. Food store sales this month were subdued as retailers reported lockdowns and restrictions on the sale of non-essential items impacted on footfall. Retail sales for 2020 saw their largest annual fall in history as the impact of the pandemic took its toll. Clothing retailers fared particularly badly, with a record annual fall of over 25%, while movement restrictions led to a record year-on-year decline for fuel sales.”

Ian Geddes, head of retail at Deloitte, noted that retail showed resilience as “Strong performance in grocery and record-breaking online sales for non-food meant that Christmas 2020 was the most digital ever.” He also added: “For now, pent-up demand is likely to see shoppers out in force once restrictions lift, as we saw in summer at the end of the first lockdown. Crucially, the reopening of the high street will this time coincide with the ongoing vaccine rollout, which should boost consumer confidence and see them return to stores once more.”

Paul Dales, chief UK economist at Capital Economics, also commented: “The tiny rise in retail sales in December shows that it wasn’t a very merry Christmas for retailers. And January’s lockdown means it won’t have been a happy start to the new year either. But at least retailers are more immune to lockdowns than many other consumer-facing businesses. The upshot is that retail sales added almost nothing to GDP in December and January’s lockdown means sales will probably drop back again this month. Admittedly, they won’t fall as far as non-retail consumer spending. According to daily data of electronic card payments, so far this month consumption has declined from being slightly above its pre-pandemic level in December to about 35% below. We suspect that GDP may fall by around 2% m/m in January. But hopefully that will be the last decline.”

Government Borrowing

The release of separate data showed that the UK’s borrowing rose in December to the highest level and it marked the third-highest borrowing in any month since 1993 when records started. The ONS said that public sector net borrowing was £34.1bn in December 2020, £28.2bn more than in December 2019.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that it is possible that total borrowing could be close to the OBR’s £393.5bn forecast. He explained that December’s high borrowing “reflected a 26.1% year-over-year jump in central government expenditure, mostly related to the Coronavirus Job Retention Scheme and the Self-Employment Income Support Scheme. Tax receipts were only down 1.2% year-over-year, thanks to growth in corporation taxes and stability in income tax receipts. However, borrowing will fall once the support schemes expire at the end of April –– and next year we could see sharp tax rises, to get the public finances back on track, Tombs predicts. Public borrowing will fall sharply from about 20% of GDP this year to between 8% and 10% in 2021/22, if the government stops the furlough and self-employment income support schemes in the spring, and healthcare spending declines. We doubt that the Chancellor will go a step further in the Budget on March 3 and push through large immediate tax rises or non-health spending cuts.” He noted that fiscal policy will tighten, and taxes are expected to rise significantly in 2022.

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