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The pound fell sharply on concerns about Britain’s weak fiscal outlook ahead of next month’s budget.
Sterling fell to a two-and-a-half-year low against the euro and a three-month low against the US dollar, falling 0.4% to 1.13 the euro and 0.4% to 1.32 to the dollar, following sharp losses on Tuesday.
This comes after reports that the UK’s independent fiscal watchdog Office for Budget Responsibility The (OBR) cut its productivity forecast – to be presented in the November Budget – by 0.3 percentage points, potentially leaving it out. Government Public finances are facing a hit of more than £20 billion.
Each percentage point decline means chancellor He needs to find around £7 billion to carry out his plans.
This may result in the Chancellor’s resignation Rachel Reeves That’s a difference of more than £20 billion, even before paying for the expected abolition of the two-child benefit cap.
apprehension It is understood Ms Reeves may have to renege on a government manifesto pledge not to raise taxes for working people as she looks to plug a hole in the country’s finances with tax rises and spending cuts expected to be in the Budget.
The pound’s decline also comes ahead of the Bank of England’s interest rate meeting on November 6, when it will publish its quarterly growth and inflation forecasts.
The bank is expected to keep rates at 4% in the next decision, with some economists now not predicting a cut until 2026 as extremely high inflation prevents policymakers from cutting further.
The Institute for Fiscal Studies (IFS) warned earlier this month that Ms Reeves may need a £22bn tax increase or spending cuts if she is to restore the £10bn headroom she left against her debt target in the spring.
Ms Reeves faces a gap in the public finances due to high borrowing costs, persistent inflation and weak growth as well as weakening her spending commitments, including partially reversing cuts to the winter fuel payment and cutting welfare.
But Ms Reeves insisted on Wednesday Britain did not need to “accept” the dire economic forecasts.
Writing in the Guardian, the Chancellor acknowledged that productivity forecasts from the OBR may be disappointing, but that austerity, Brexit and the pandemic have left “deep scars” on the UK economy.
But she said she was “determined that we don’t just accept the forecasts but we defy them” and “will not repeat the past or let the mistakes of the past determine our future”.
He said: “If productivity is our challenge, investment is our solution.”
In a welcome bright spot for the government, gilts rose on Wednesday as borrowing costs continued to slide.
The yield on 10-year gilts fell again to 4.39%, a level not seen since December last year.
Gilt yields move inversely to the value of bonds, meaning their prices rise when yields fall.