Pound recovers as Osborne outlines fiscal plans

June 22, 2010

BRITAIN-BUDGET/

- Mark Bolsom is head of the UK Trading Desk at Travelex Global Business Payments. The opinions expressed are his own. -

As widely expected, Chancellor George Osborne took a tough stance in his first budget and unveiled some “unavoidable” cuts and taxes.

It was slightly more aggressive than I had expected, as he promised to reduce the entire deficit by the end of his parliamentary turn. It was moderate in other areas, however – the bank levy was not as severe as expected, for example, nor was the rise in Capital Gains Tax.

It is risky for Osborne to cut spending and raise taxes when economic recovery remains fragile. Whilst the budget deficit will be cut a lot quicker than it would have been under Darling, the impact on growth is unknown and could be severe.

Politically, however, this was Osborne’s only real opportunity to ramp up cuts and taxes, whilst lambasting the outgoing Labour government for their alleged ‘fiscal negligence’. “

Osborne’s move to raise VAT was somewhat surprising, given the UK’s current rate of inflation (3.4 percent). The new VAT rise will be inflationary and heap pressure on the Bank of England to raise interest rates.

Treasury officials will hope that inflation is back under control by the time the tax becomes a reality. It will also put an added pressure on the consumer, and encourage them to spend less, which, in the long-term, may curb economic growth.”

The financial market’s reaction was largely supportive, and we will now have to wait and see how credit agencies have reacted to the budget. I think they’ll certainly be more reassured, as Osborne outlined clearly how he will cut spending, but that may not be enough.”

Sterling was also supported by the budget, and it was up against both the euro and dollar post-announcement. Markets will have priced the news in, as much of it was leaked before and Osborne’s announcements were, in the main, expected.

The pound will also be benefitting from the fact that the rise in Capital Gains tax and the bank levy could have been worse. The structural deficit is also going to be reduced, which is a positive move. Investors will now be watching to see what reaction the credit agencies have. A negative response from them will have a negative impact on the pound.

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Picture Credit: A truck illuminated with the amount of Britain’s debt passes the Houses of Parliament as Chancellor George Osborne presented his budget in London June 22, 2010. Osborne announced the harshest budget in a generation on Tuesday, promising to bring a record budget deficit of 11 percent of GDP down to 1 percent in 5 years. REUTERS/Luke MacGregor

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