Portugal needs a bailout yet EUR still strong
So Budget 2011 has been and gone, but what does it all mean? The Chancellor proclaimed his budget was going to put the ‘fuel in the tank of the UK economy ‘and in a literal sense the one pence reduction in fuel duty will help ease the burden when filling our cars at the pumps. In terms of driving the UK economy, corporation tax will decrease by 2% next month followed by a 1 percent reduction each year to reach 23% by 2014-2015. It is worth pointing out that these tax cuts will not benefit the banking sector with the bank levy being increased to offset the lower tax level – the Chancellor sensing the public would not take kindly to tax cuts for banks!
There was a raft of other business friendly measures as well with the government fully aware that the private sector is essential to creating jobs at a time the public sector is facing cuts. Business rate tax relief will be extended to October 2012 to help struggling small businesses, regulation on real estate investment trusts will be altered to encourage house building, enterprise zones are to be created and research and development tax credits are doubling to encourage more innovation in the economy. Will all this work? Well, only time will tell, as measures such as the cut in corporation tax taking years rather than months to assess whether more companies will want to move to the UK. In an early positive sign for the government, the publishing business UBM stated yesterday that it was ‘actively reconsidering’ a move back to the UK after moving to Ireland in 2008 for tax reasons.
Despite what seemed to be the giveaways for business the Chancellor’s overall spending plans stayed the same with money simply being redistributed. For example, the fuel duty decrease was funded by an increased tax on oil companies operating in the North Sea. With this in mind, the markets were relatively underwhelmed for a budget day with the Bank of England’s MPC minutes having more of an impact on events.
The MPC minutes showed that there was no change from last month, with the committee voting 6- 3 in favour of keeping rates on hold. This had Sterling coming off the 14 month highs against the US dollar at 1.6176, with much of the support in recent days stemming from the belief a fourth member had joined the rate hike camp. Sterling was also down against the Euro at 1.1454 on the back the minutes, but with the Portuguese Prime Minister resigning yesterday after parliament rejected further austerity measures, the likelihood the country will require a bailout has increased significantly.