Brexit Means Britons Hoping for Budget Relief Need to Wait

Updated on
  • U.K. may file for divorce from EU within days of Budget
  • Better forecasts give Hammond scope for limited giveways

Jim O'Neill Says Brexit Economics Not Given Much Thought

U.K. Chancellor of the Exchequer Philip Hammond, overseeing an economy that has defied the doomsayers, may choose to keep his powder dry in his Budget on March 8 as he prepares for the possibility of turbulence after formal Brexit negotiations are triggered this month.

With tax receipts running ahead of forecasts, the budget deficit this year is on course to come in well below the 68 billion pounds ($83 billion) predicted by the Office for Budget Responsibility in November. The watchdog is expected by many economists to forecast lower borrowing over the coming years, the first improvement to its fiscal outlook since early 2014.

Nevertheless, any giveaways are likely to be limited and targeted. With Prime Minister Theresa May expected to trigger the formal process for leaving the European Union as early as March 15, Hammond will want to keep money aside to deal with any volatility as Britain embarks on two years of divorce talks.

“He’s given himself a lot more headroom than chancellors have done in the past but that’s commensurate with the uncertainty that lies ahead,” said Adam Corlett, an economist at the Resolution Foundation think tank.

Targets for help include social-care services, as cash-strapped local authorities struggle with the rising cost of looking after the elderly and disabled, though the Treasury has dismissed speculation of a so-called death tax, a levy on deceased people’s estates, to plug the shortfall. The National Health Service, facing an annual hit of about 1 billion pounds due to changes used to calculate payouts for compensation claims, may also receive funds after the government pledged to offset the extra cost. 

Working Families

Ordinary working families, which May has pledged to help as part of her vision for a more inclusive Conservatism, may have to wait until the autumn so that the Treasury can gauge economic sentiment and the impact of accelerating inflation as Brexit talks progress.

Also on hold is an overhaul of the business-rates system, though Hammond has pledged some relief to those hardest hit by changes to the way the levy on commercial premises is calculated.

Hammond plans to make major budget announcements such as tax changes toward the end of the year, with the traditional spring budget downgraded to a “spring statement” starting in 2018.

The economy has done better than the OBR predicted since the June referendum, notching up growth of 0.7 percent in the fourth quarter -- the fastest pace in a year. But there are signs that consumer spending -- the engine of the expansion -- is coming under pressure from soaring food and energy prices as the weak pound pushes up import costs.

Economic Slowdown

Growth is forecast to slow to 1.5 percent this year from 1.8 percent in 2016, according to a Bloomberg survey of economists. While that’s slightly above what the OBR forecast in November, it would still be the weakest performance since the financial crisis.

With data published for the first 10 months of the fiscal year, the deficit in 2016-17 is on track to undershoot official forecasts by as much as 12 billion pounds. According to the Resolution Foundation, borrowing in the five years through March 2021 could be 29 billion pounds less than predicted.

Such an improvement would leave Hammond ample room to meet his new fiscal rule: that structural borrowing should be no higher than 2 percent of national income in 2020-21. On current projections, the deficit will be less than 1 percent, giving the chancellor 27 billion pounds of “firepower” should fiscal stimulus be required to support the economy.

But it would do little to undo the downgrade announced in November, when the OBR added 122 billion pounds to its five-year borrowing forecast -- almost half of it due to the Brexit vote. It leaves Britain facing years of continuing austerity if Hammond is to achieve his goal of balancing the books as soon as possible after the 2020 general election.

(Adds details on possible measures in fifth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE