Months after its own financial turmoil, U.K. set to release new budget


In the U.K., the collapse of SVB Financial brought to mind its own financial turmoil about five months ago.

Like U.K. pension funds were in October, SVB’s bond portfolio was caught out by the huge rise in interest rates. In both instances, the country’s central bank stepped in to backstop their respective financial systems. One key difference was that the U.K. crisis was exacerbated by the use of derivatives, whereas SVB’s difficulties stem from a lack of derivatives use.

The cause of last year’s turmoil in the U.K., a fiscally aggressive mini budget, has been almost entirely reversed under the new prime minister, Rishi Sunak, and his chancellor, Jeremy Hunt. Hunt on Wednesday is due to deliver the official budget, which unlike its corresponding document in the U.S., is eagerly anticipated because it usually becomes law.

The British pound
which fell as low as $1.03 the Monday after the mini-budget was delivered, was over $1.21 on Tuesday.

“With interest volatility still very elevated, and the ramifications of last year’s mini-Budget still very apparent in the public finances, we think Chancellor Hunt will err on the side of fiscal prudence rather than fiscal activism,” said economists at Deutsche Bank in a note to clients.

“We think more generous policy easing will probably be saved for the autumn — at the earliest,” added Morgan Stanley economists.

There should be some good news. The Office for Budget Responsibility is expected to upgrade economic projections, and downgrade deficit and inflation forecasts. There’s roughly £30 billion ($36 billion) of fiscal space compared to the OBR’s last forecast in November.

One key question is how the money will be deployed, and in particular, the degree to which energy support provided to households and businesses will be curtailed.

Another question is whether some of the budget space will be used to boost public-sector pay after a series of strikes.

Another possibility is that the state pension age, currently 66 and set to rise to 67, will be increased to 68, according to reports.




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