Tax hikes hurt recovery, pound falls against euro and dollar
Photo by Andrew Parsons / No 10 Downing Street.
- Market rate at publication:
- GBP / EUR: 1.1630 | GBP / USD: 1.3778
- Bank transfer rate: 1.1400 | 1.3490
- Specialized transfer rates: 1.1570 | 1.3680
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The pound lagged behind on Tuesday after further tax hikes were announced in the UK, a move the government said was needed to pay for health and welfare systems.
However, economists said the tax hikes were severe enough to hamper the UK’s economic rebound, and with forex markets focused on relative economic performance, this could set a mark against the pound sterling.
The government plans to raise an additional £ 12 billion a year through tax increases that include increased national insurance contributions and a tax on dividends.
Andrew Sentance, senior adviser, Cambridge Econometrics, says the government risks repeating the mistakes of 2010 when the government hampered the recovery by raising VAT from 17.5% to 20%.
“Their successors – Boris / Sunak – risk doing the same by increasing national insurance. Any tax increase should be postponed until 2024/2025 at the earliest,” Sentance said.
National insurance would be increased by 1.25 percentage points for employers and employees, while a dividend tax would also be increased by 1.25%.
Following Prime Minister Boris Johnson’s speech in Parliament, the pound-euro exchange rate lost 0.28% to quote at 1.1622 and the pound-dollar exchange rate lost nearly 0.40% to quote at 1.3787.
Above: GBP / EUR hourly (top), GBP / USD hourly (bottom) as news of tax hikes is digested by the market.
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The declines were widespread, suggesting there was an element of negative sentiment specific to the pound in the market.
Samuel Tombs, UK chief economist at Pantheon Macroeconomics, says tax hikes risk acting as a fiscal drag on the UK’s economic recovery.
“Markets’ expectations that the MPC will raise the bank rate in the second quarter of 2022 seem far removed from reality, now that households will be hit by a tax hike in April that will lower the average wage of workers in the country. 1.2% tax focus, ”says Tombs.
The pound’s value is currently in line with investors’ expectations for the Bank of England to raise interest rates in 2020, so any delay in movement could result in the currency revaluing lower.
“We believe the combination of fiscal tightening and party backlash may weigh on the pound sterling,” said Elsa Lignos, global head of foreign exchange strategy at RBC Capital Markets.
The UK economy was set to grow faster than its developed market counterparts in 2021 as it rebounded from lows caused by covid lockdowns, but any headwinds caused by increased government taxes could lead to a reassessment of the economy. magnitude of the rebound.
“The increase in national insurance is essentially a tax on jobs. Given the economic challenges we face as we recover from the impact of Covid and lockdowns, I think this is the wrong one. politics at the wrong time, “said Scott Gallacher, director at Rowley Turton.
The UK government has provided generous support to workers on leave and some businesses during the pandemic, but that tax support will end in September when the leave scheme is finally phased out.
Most businesses that have received government loans are now repaying them.
“Now is not the time to increase national insurance. It will be a difficult time for people anyway with the end of holidays, the end of the stamp duty holidays and high inflation. The last thing what we need right now is to be paying more taxes. And that’s what NI is, a tax, “says Joshua Gerstler, owner of The Orchard Practice.
Shaun Moore, tax and financial planning expert at Quilter, said the dividend tax would hurt UK entrepreneurship.
“There are hundreds of thousands of directors of public companies who pay themselves income in the form of dividends. This is a group that was deprived of any financial support during the pandemic and is now facing double the It is a big blow to see his income hit just as the recovery takes shape and they are trying to get a foothold. Homeowners will not face further tax increases due to the new tax either, “he said.