6 March 2024: National Insurance is the “favourite” to be cut

Finally, after what has seemed an interminable wait, Jeremy Hunt will deliver his Spring Budget to Parliament just after lunchtime today. Several Government MPs. who formed the intake following the 2019 election who can barely remember life under a socialist government, owe their seats to the charismatic personality of Boris Johnson and his “demolition” of the “red wall”, and are now begging the Chancellor to cut taxes to at least give them a chance to win their seats in the General Election that will take place later this year.

Over the past couple of days, rumours have grown that Hunt’s most headline-grabbing change will be a cut of 2p in the pound in National Insurance contributions. He has done this before, but the effect was underwhelming as far as the economy was concerned.

A cut in the rate of National Insurance is less expensive, at £10 billion than an equivalent cut in the basic rate of income tax. He is also expected to extend the freeze on fuel duty, which will provide relief to both commercial and private drivers.

It is unlikely that there will be any “fireworks” that Conservative backbenchers crave since Hunt has already said that any new measures will be considered, measured, and prudent.

Such a Budget is unlikely to get the “blood pumping through the veins” of voters.

This will almost certainly be the “final throw of the dice” for the Government since there is continuing speculation that an election will be called for May.

Polls predicting the results of the “local” elections that will be held in early May are predicting a “bloodbath” for the Conservatives, and Rishi Sunak may want to “lessen the blow” by holding the General Election soon after.

Since the Election, which followed soon after David Cameron’s departure when the Brexit vote went against his advice to the nation, the Conservatives have had two historic events to deal with; first, delivering Brexit as demanded by the poll and then the Pandemic. Boris Johnson delivered the former but then overstepped.

Not necessarily in his handling of the Pandemic, but in placing his complete trust in his staff at Number Ten who betrayed him and allowed him to “lie” to Parliament, which ultimately led to his downfall.

All that will likely be left after the Budget will be to “kick over the embers” of the last Parliament of what is now called a “lost decade” as austerity and cuts in public spending replaced growth and economic output.

Inflation has, with hindsight, been the inevitable consequence of the level of support that then Chancellor Rishi Sunak poured into the economy and the Bank of England had to call upon the services of former Fed Chairman, Ben Bernanke to understand how the Bank’s forecasting tools got it so wrong.

Even if a Budget is delivered that is both expansive and inflationary, growth estimates are likely to be cut before the end of the present quarter. The current forecast is for the economy to grow by 0.7% this year and 1.4% in 2025. That is likely to be cut to 0.5% and 1.2% respectively.

The pound rallied to its highest level since early last month but could not break through resistance at 1.2740, reaching a high of 1.2734 and drifting back to close at 1.2705.

The FOMC meeting which is scheduled to take place in two weeks is unlikely to provide any further clues on the timetable for the rate cuts that the market is craving.

That craving is not because traders and investors believe that a cut is an economic necessity, rather they thrive on volatility and since the beginning of the year, the market has lacked any vibrancy since Jerome Powell and his colleagues appear to be singing from a single hymn sheet, and have provided advance guidance of their actions that has, so far, proven to be correct.

Raphael Bostic, the President of the Atlanta Fed, has become the self-appointed voice of the hawks on the FOMC over the past couple of months, and he spoke earlier this week of the Fed having the luxury of there being no economic pressure on the Committee to cut rates to promote economic growth.

Data for fourth-quarter GDP, which was finalized last week, showed that the economy followed up 4.9% growth in Q3 with growth of 3.2% between October and December.

Although the Q4 data was a little disappointing, no one is complaining about an economy that is growing more than 3% when other G7 nations are struggling to avoid recession, even if most of that growth is due to the performance of consumers.

Yesterday, was Super Tuesday in the U.S., the day the Candidates who will contest the Presidential election are often all but confirmed.

It was no different this year, as the octogenarian Joe Biden and the soon-to-be octogenarian Donald Trump extended their leads.

It now appears to be a formality for Trump to gain the Republican nomination, while there are still some who are questioning Biden’s apparent frailty and issues with his memory, which are adding to concerns that he may not be able to serve a full term.

The dollar index has not followed through on the strength it exhibited in the first few weeks of the year, as traders have been awaiting the Fed to make its move. It may well be that the FOMC may feel no need to cut rates until June, in which case the Greenback will most likely end the quarter as it began, on the front foot.

Yesterday, the dollar index tested the bottom of its recent range, falling to a low of 103.58. It recovered to close at 103.77 as it failed to regain the 103.80 which was its short-term support level previously and has now become resistant.

The euro has seen a bout of strength over the past couple of weeks, which will come to nothing if the Governing Council of the ECB does anything other than continue to avoid calls for a rate cut following tomorrow’s meeting.

The market is satisfied that there will be no rate cut agreed upon at the meeting, but the level of expectation is growing that Christine Lagarde may change her rhetoric sufficiently for traders to expect an imminent cut.

The Q1 wage data is growing in stature as the inflection point which will become a watershed moment on the path to lower rates and a growing economy.

Once the cycle of rate cuts has begun, the market will begin to speculate on how low rates can go.

A lot will depend on the path of inflation, which is expected to reach the ECB’s target of 2% in the next couple of months. If it remains around that level the ECB may fall sufficiently confident to drive rates to a point when they are lower than inflation, but as in the U.S. the confluence of growth and inflation is almost impossible to realize and that is the reason why there are so few soft landings.

There have been no recent comments from the hawks on the Governing Council, like Isabel Schnabel and Robert Holzmann, indicating any softening of their stance.

For that reason, the common currency is unlikely to lose much ground during the current round of Central Bank meetings.

So far this week, there has been some marginally better data from the Eurozone which appears to support Lagarde’s view that the overall Eurozone economy is “bottoming out”.

This could encourage the ECB to delay a rate cut as it looks for more evidence that the economy is beginning to stabilize. That may come as unwelcome news to the weaker economies of the region that are expecting the boost that a rate cut could provide.

Yesterday, the single currency rallied to a high of 1.0876 but quickly ran out of buyers and quickly fell back to close at 1.0857 as traders “battened down the hatches” in anticipation of tomorrow’s ECB meeting.

Have a great day!