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The Chancellor is set to unveil the government’s latest tax and spending policies next week, along with his broader economic ambitions for the Labor administration.
The announcement comes as the state of the economy remains a serious concern, particularly following criticism from the industry regarding the impact of the government’s inaugural budget last year.
Adding to the anticipation, the kingdom’s official forecaster is set to release his key economic projections for the coming years, raising concerns over a potentially bleak short-term outlook.
Here we take a look at the importance of this budget for the economy:
What is the background of the budget?
Britain’s economy started the year with positive growth gross domestic product (gross domestic product) growing by about 0.7% in the first quarter of the year.
Still, it was boosted by strong trade ahead of the expected tariffs and came amid an increasingly uncertain global economic backdrop.
This growth has slowed steadily as the year has progressed, with the Office for National Statistics (ONS) reporting growth of 0.3% in the second quarter of the year and 0.1% in the third quarter.
This decline has come amid a decline in the manufacturing sector as well as slow growth in the services sector.
Meanwhile, inflation has risen over the past year, reaching a peak of 3.8% in July, August and September.
It declined slightly last month – albeit at a slower pace than expected – but also against a backdrop of decelerating wage growth.
Consumer finances were supported by strong wages but real wage growth has slowed significantly in recent months due to labor market pressures.
Unemployment has also declined, reaching a four-year high of 5% in the three months to September.
Why is the last budget important?
Weak hiring, slow wage growth and price inflation are all partly linked to policies that came into place after the Labor government’s first budget last year.
The Budget led to increased taxes and labor costs for many businesses when the policies were implemented in April this year.
Companies were hit by other taxes such as the increase in the national minimum wage, higher National Insurance Contributions (NICs), lower business rates exemptions and the new packaging tax.
Bank of England It highlighted that increases in the NIC and minimum wage partly contributed to the high food price inflation earlier this year as affected companies passed some of it on to their customers.
What is the outlook of businesses ahead of the budget?
Businesses and trade bodies have stressed that they have come under pressure from the last budget and urged the government to avoid imposing further increases on them.
Industry data also showed that some business spending has been put on hold ahead of the Budget, with companies being cautious about their financial position.
The latest monthly flash PMI economic data – which reflects activity in the UK private sector – showed that activity was hit by cautious decision-making by firms ahead of the Budget.
What is the view of consumers?
consumer spending It has also been broadly cautious in recent months, with Bank of England policymakers recently focusing on saving in favor of spending.
On Friday, the ONS said retail sales in October fell for the first time in three months as shopping ahead of the Budget also halted.
Economists have cautioned that the projected increase in personal taxes in the Budget means some consumers will reduce their spending plans rather than delay them until closer to Christmas.
on ruth gregory capital economics Said: “The risk is that the fourth quarter is not golden for retailers and higher taxes in the Budget curb retail spending over the crucial festive period and into next year.”
Why is the focus on the government’s ‘fiscal deficit’ and what does it mean?
The so-called “fiscal hole” is the difference between a government’s projected spending and its projected revenues, usually through taxes or borrowing.
This is particularly important for the government as it seeks to meet the fiscal rule that it must balance expenditure and revenue over the next five years.
Economists have estimated that a significant “fiscal gap” has widened since the last spending review, with failures to pass welfare cuts, increased borrowing costs and expected readjustments in productivity forecasts resulting in lower-than-expected spending cuts.
Nevertheless, reports have suggested that the original predictions of a fiscal gap of around £30 billion have now been reduced, with the Financial Times indicating that the OBR thinks it will be closer to £20 billion.
Last week, reports indicated that the government will not go ahead with the expected increase in income tax as they do not need to raise that much money to close this black hole.
On Wednesday, the Office for Budget Responsibility will report how much money would be generated from new spending cuts or tax increases to address it.
It will also unveil its latest forecasts for key economic metrics such as economic growth, unemployment and inflation.
Will the Budget be important for financial markets?
The Budget may impact trading in the financial markets, as there is significant speculation about potential policy decisions.
Generally, the value of the pound and the price of gilts – government bonds – are most likely to be affected by budget policy.
Gilt yields, which tend to rise as prices fall, rose earlier this week but are still significantly lower than earlier this year as borrowing costs fell amid low interest rates.
Both pound and gilt prices approach cautious spending commitments and limited tax changes positively, especially if they believe tax policy is likely to hinder economic growth or broader investment.
The FTSE 100 and other domestic equity indices are not directly affected by changes in domestic policy, although they can be affected by fluctuations in the pound.
However, there may be changes in the value of stocks in specific sectors targeted by the policy.
For example, listed gambling companies have seen speculation about increased fees on sports betting put pressure on their share prices.