Lawmakers will vote on Prime Minister Boris Johnson’s tax proposals, which raise the overall tax burden to the highest in decades.
The government has said the extra revenue is crucial to pay for health and social care as the country recovers from COVID-19 and after a long period of inadequate funding, and it is expected to pass the new legislation easily.
The pound extended its fall on Tuesday after the announcement. Analysts said higher taxes could slow the economic recovery, but more importantly for the pound may ease pressure on the Bank of England to begin tightening monetary policy.
By 0800 GMT, sterling was 0.1% lower at $1.3767. Against the euro the pound dropped by a similar magnitude to 85.95 pence.
The British currency on Tuesday hit its weakest versus the euro since late July.
“The higher taxes on employee earnings and employer wage costs could dampen the strength of the economic recovery from the pandemic in the coming years,” said MUFG analysts in a note.
“There is a risk higher taxes will undermine household consumption and hiring by businesses. At the same time fiscal tightening will ease the need for the BoE to tighten monetary policy.”
“The pound has strengthened so far this year on the back of rising UK rates but further gains in the coming months are likely to prove more challenging,” they added.
“It will be difficult for GBP/USD break above resistance at 1.4000 and for EUR/GBP to break below support at 0.8500.”
For a look at all of today’s economic events, check out our economic calendar.
(Reporting by Tommy Wilkes; Editing by Jan Harvey)