Hammond Tries to Talk Up U.K., But Numbers Don't Back Him
(Bloomberg) -- Philip Hammond tried to talk up the U.K. economy, but the numbers don’t back him up.
In 2021, when the U.K.’s Brexit transition will have ended, the government’s budget watchdog lowered its growth forecast. What’s more, it looks like the country is going to be paying money to the European Union for decades to come, well into 2060.
The U.K. chancellor is in an bind: voters are angry after eight years of austerity but Hammond lacks the resources to be able to significantly relax the pain. At the same time his Conservative Party is deeply divided on how to tackle Brexit, and he falls firmly in the camp of those in the party that fear there is no bright side to quitting the world’s biggest trade bloc.
Hammond tried hard to disguise the gloomy picture in a 30-minute Spring Statement where he repeated his line about “seeing light at the end of the tunnnel.” That’s a hint he may throw some more money at public services and pay in the Autumn, when he’ll unveil fiscal changes and the country will be mere months away from Brexit day in March 2019.
By then it will be clear if the U.K. will have sealed a deal with the EU on a grace period of two years designed to give companies time to adapt to Brexit.
“Forecasts are there to be beaten,” Hammond told lawmakers in the House of Commons, after reading the OBR’s prediction the economy will grow at 1.4 percent in 2021 and 1.5 percent a year after, which is lower than what it forecast less than four months ago.
Hammond wouldn’t be drawn into committing extra money found for the National Health Service, which has just been hit by the worst winter on record. He’s hardly in a position to do so.
Indeed, the OECD said Tuesday the U.K. will be the worst-performing Group of 20 economy this year and next, citing in part the impact of Brexit.
“This is just a fact: Britain in 2018 and 2019 will have the lowest growth rates in the G-20 and this is due partly to the uncertainty linked to Brexit,” OECD chief economist Alvaro Pereira said in Paris as the group updated its global growth outlook. “Getting rid of that uncertainty is essential.”
In its assessment of the economy, the OBR played down a recent pickup in productivity -- it expects the fall in hours worked that boosted output per hour in the second half of 2017 to be reversed -- and said there had been no improvement in the underlying fiscal position.
Hammond will have 15 billion pounds of headroom against his target to cut the structural deficit to below 2 percent of economic output by 2020-21, the same as estimated in November, the OBR said.
The Institute for Fiscal Studies noted that the OBR forecasts imply the economy will be 3 percent smaller in 2021 than predicted before the Brext vote two years ago, with real earnings no higher than they were prior to the financial crisis.
Instead of the 10 billion-pound budget surplus envisaged by the end of the decade, Britain is now on course for a deficit of 34 billion pounds, meaning “difficult choices” face Hammond if he wants to balance the books by the mid-2020s as promised, said IFS Deputy Director Carl Emmerson.
On borrowing, the best news comes near term after stronger-than-expected revenue this year. The OBR lowered its forecast for the year ending March 31 by almost 5 billion pounds to 45.2 billion pounds and predicted Britain will return to surplus on its day-to-day budget in the coming year for the first time since 2002.
The Debt Management Office cut its gilt-issuance plans for 2018-19 to the lowest in a decade. The 10-year gilt yield was little changed at 1.49 percent as of 4:10 p.m. in London. The pound was at $1.3982, up 0.6 percent on the day.
With the main annual budget now taking place in the fall, the Spring Statement was, as Hammond, promised, devoid of major policy announcements. Instead, he unveiled a handful of measures to help small business and held out the prospect of a new VAT collection system for online sales to ensure the tax consumers pay “actually reaches the Treasury.’’
©2018 Bloomberg L.P.