UK’s Sunak pledges “whatever it takes” budget

Market analysts react to a harsh but possibly rejuvenating plan from the Chancellor

UK Finance minister Rishi Sunak promised on Wednesday to do “whatever it takes”, including a five-month extension of Britain’s huge jobs rescue plan, to steer the economy through what he hopes will be the final months of COVID-19 restrictions.

Sunak, who also announced tax increases, said the budget deficit in the 2021/22 financial year, which starts in April, is expected to be 234 billion pounds ($327 billion), or 10.3% of GDP, citing new forecasts from the Office for Budget Responsibility (OBR).

Following are comments from market analysts:

Valentin Marinov, Head of G10 FX Research at Credit Agricole, London

“Chancellor Sunak confirmed earlier reports that the government will start introducing some fiscal austerity measures in an attempt to boost the UK fiscal outlook.

The UK is thus to become the first major economy to consider such measures.

While this is a commendable policy if you are a rating agency, for the FX markets this could mean a potential downside risk to growth in H2 2021 and especially in 2022.

Indeed, a premature withdrawal of the fiscal support for the economy could slow down and even derail the recovery at a time when post-Brexit uncertainty lingers and thus clouds the outlook for the services sector of the economy.

To the extent that this also makes the BoE more cautious and thus more willing to push against any further tightening of the UK financial conditions, it could also hurt the GBP.”

Vivek Paul, UK Chief Investment Strategist, BlackRock Investment Institute, London

“Though continued support remains the right policy prescription for now, the Government also signalled some measures to deal with the sharp rise in debt resulting from its pandemic relief.

That said, this doesn’t herald a return of the austerity seen after the global financial crisis, in our view.

Low interest rates are providing fiscal breathing room by keeping debt servicing costs low – for now. But the UK has less room for manoeuvre than other Western economies.”

Rachel Winter, Associate Investment Director at Killik & Co, London

“Markets reacted positively to the plans to extend support for individuals and businesses, with sterling strengthening marginally during the early part of the speech.

The key UK indices remained in positive territory despite the announced increase to UK corporation tax.

Banking shares are up today, reflecting the Office for Budget Responsibility’s upgraded forecasts for the UK economy.

Housebuilders are among the biggest gainers on the market, as they stand to benefit from the extension to the stamp duty holiday.” ($1 = 0.7160 pounds)

(Reporting by Julien Ponthus, Ritvik Carvalho, Joice Alves and Carolyn Cohn; Editing by Catherine Evans)