The GBPEUR exchange rate saw a strong move towards the 1.17 figure on Wednesday after Boris Johnson confirmed his reopening plans. The pair gave up some of those gains as profit-taking kicked in ahead of the latest budget from Chancellor Rishi Sunak. Sunak has an opportunity to boost the battered economy after its worst slump in 300 years on the back of the government’s lockdown strategy.
The Bank of England’s Chief Economist Andy Haldane has warned of an inflationary ‘tiger’ tat has been awoken by the pandemic stimulus measures.
Sunak Plans Unpopular Raids to Balance the Books
Rishi Sunak is planning to raid businesses and wealthy pensioners to plug the hole in the UK finances. Despite warnings from former Prime Minister David Cameron and other Tory members, the Chancellor is expected to raise corporate taxes from 19% to 25%.
Cameron told a US media outlet:
Speaking to CNN, he said: “…piling, say, tax increases on top of that before you’ve even opened up the economy wouldn’t make any sense at all.”
The move is expected to help cover the government’s pandemic spending, which is expected to hit £300 billion as support measures are expected to be extended into the summer. The £54 billion furlough wage support program is certain to be extended his cuts to business rates and sales tax are also expected to continue.
Boris Johnson outlined a cautious reopening plan with the country expected to be operating as normal in June, with foreign travel allowed in the month prior.
Some Tory MPs have been on “four or five” Zoom calls with the Chancellor with some warning him about raising taxes.
Andrew Bridgen, MP for North West Leicestershire told reporters: “If he were to raise taxes, it would undermine everything we’ve done to get businesses to this stage. No society can ever tax its way to prosperity.”
Sunak is also set to break manifesto promises and cap pension allowances for wealthy pensioners. This move has been supported by former Chancellor’s of the UK, but it highlights the tough job that Sunak will have in trying to balance the books, while appeasing MPs and the public.
Haldane Warns That Inflationary ‘Tiger’ Has Awoken
Last week saw yields rising in the developed economies and the BOE’s Chief Economist broke ranks with many central bank officials to warn of an inflationary “tiger”.
Haldane said:
“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely. But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”
Haldane also said there was “tangible risk” that inflation could be more “difficult to tame”. Crushing interest rates to zero and pumping stimulus monies into the economy was the easy part. Central banks will now have to balance inflationary risks, while governments will also have to make tough decisions on spending.
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