Brexit Bulletin: The Chancellor to Play It Safe

With risks mounting, Philip Hammond’s first budget statement next week won’t spill much red ink.

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Chancellor of the Exchequer Philip Hammond isn’t planning on spilling too much red ink next week when he delivers his first major outlook for fiscal policy.

While PricewaterhouseCoopers, Deutsche Bank and RBC Capital Markets all say the fallout from Brexit will force him to increase borrowing by at least £100 billion ($125 billion) over the next five years, Bloomberg’s Svenja O’Donnell reports today that Hammond is unlikely to introduce many major tax and spending changes in his Nov. 23 Autumn Statement.

Philip Hammond, U.K. foreign secretary.
Philip Hammond, U.K. foreign secretary.
Photographer: Justin Chin/Bloomberg

Treasury officials say risks to the economy from accelerating inflation, the potential volatility from Brexit talks and the ongoing budget deficit mean Hammond wants to be conservative.

His focus will be on targeted investment projects -- in the low billions of pounds -- and on setting a longer-term fiscal framework that will give the Treasury room to react to shocks.

What Happens to EU Contributions?

One question analysts are asking is what the accounts will show for the U.K.’s contribution to the EU budget after 2019, which is when May is intending to have left the bloc.

The Office for Budget Responsibility estimated in March that the U.K. would send £11.8 billion to Brussels in the current fiscal year, not allowing for the rebate or EU spending the U.K. gets back. 

According to Sam Hill and Vatsala Datta of RBC, the easiest thing to do would be to assume that once membership ends so do budget contributions. That would allow Hammond to rack up a reduction in the deficit and also declare that Brexit will grant taxpayers a saving.

Still, Hill and Datta warn the £10 billion saving won’t be a “silver bullet” for public finances, given the deterioration in tax revenue they expect as the economy slows.

Thatcherites Back Migration

Margaret Thatcher may not have been a fan of Europe when she was prime minister, but a think tank that supports her legacy is a fan of its immigrants.

Labor flows from the EU are good for Britain, the Institute of Economic Affairs said in a report, and despite what the government says, the free movement of workers should be preserved even if the U.K. quits the bloc.

Migrants boost productivity and could ease the burden of national debt by the equivalent of £2,000 per person. The government should end its “arbitrary” cap on migration and adopt a Swedish-style system whereby foreigners of any skill level can work in the U.K. provided they have been offered a job, it said.

The report was issued a day after official data showed the number of EU nationals working in the U.K. reached a record 2.26 million in the second quarter, or 7.1 percent of the total. Media reports speculated people were heading to Britain before Brexit takes hold. 

A study for NatCen Social Research yesterday showed Britons are finding it hard to choose a path for Brexit. The survey of 1,391 voters found that 90 percent want to retain access to trade, while 70 percent want limits on EU citizens in Britain. EU leaders have said the U.K. can’t have it both ways.

Meanwhile, Baltic officials said the EU should be careful not to come down too hard on the U.K. as it tries to reduce immigration. 

“I do not believe in punishing Britain,” Latvian Finance Minister Edgars Rinkevics said in an interview. “We can discuss some mechanisms on how to address concerns such as social security and taxes. These are legitimate concerns, but we can’t close borders.”

Brexit Bullets

On the Markets

The pound gained for the first time in four days as data showed U.K. spending surged in October by more than economists estimated. Retail sales rose 1.9 percent from September, with cooler weather boosting sales of warmer clothes.  

And Finally...

For clues on how U.K. immigration policy might work after Brexit, try looking at a small island just off the northern coast of France.

The U.K. government has studied how the British isle of Jersey -- whose legislature and judiciary are still independent from the mainland -- controls migration, according to local officials.

Jersey, which is outside the EU, allows free movement of the bloc’s nationals yet controls population flows by limiting the availability of work, housing and welfare to new arrivals. 

“When we described the system we have here, it seemed to resonate,” David Walwyn, director of Jersey’s ministry of external relations, told Bloomberg’s Joe Mayes.

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