US and UK Soft Measures From the Fisc Leading to Stronger Potential Recovery

One of the most impressive fiscal exercises in the recent past was the UK budget, presented on March 3, 2021. This is the first budget post the Brexit departure event, which was marked by lot many uncertainties. The corporate tax rate has been hiked to 25 % from the current 19 % while leaving majority of the smaller corporates from its immediate incidence. Corporates which make huge profits pay for the national effort in the face of the pandemic to a significant extent. It is quite a progressive thinking to look at taxing corporates a bit high to make the soft posture of the fisc towards the common man more tangible at a time when employment and wages have been under tremendous amount of pressure. The Chancellor says the economy will recover more quickly from the pandemic than previously thought, with the economy returning to its pre-pandemic size six months earlier, by the middle of next year. Economic growth is projected at 4% for the current year and the GDP is expected to grow by 7.3% in 2022. This is a revival from the 9.90% decline in 2020. In an economy where housing starts is so important, the stamp duty holiday is extended till mid-year to encourage people to buy their own accommodation, further scaffolded by a mortgage guarantee for first-time buyers access 95% mortgages. The furlough scheme which enables the government to pay the salaried 80 % of the wages for the hours they do not work is extended by the budget, which means that companies will continue to get support in compensating their employees during the pandemic period, till it is eradicated. The pandemic support is still at £352bn. The budget is hailed as a document which details the measures which will reduce the pain for the common man and create demand in the economy. Despite Brexit and the associated developments, the economy, and more particularly the currency, has remained quite resilient.

The additional fiscal stimulus in the US is to the tune of US$ 1.90 trillion. This is something which the markets have been eagerly waiting for. But the joy of this new package is probably clouded to some extent by the rising bond yields, though the Fed has time and again reaffirmed its commitment to accommodative policy and provision of sufficient liquidity. But the central issue is the likelihood of higher inflation as economic growth gathers speed. The Fed Chair recently said that growth may bring with it rising inflation, but he did not expect it to last long. But the assessment of many market participants is that the moment price level starts surging Fed may start fighting inflation with rate hikes. The US treasury 10 Year benchmark has moved up to 1.60 % in a short span of time.

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