Hammond to Resist Demands for Spending Splurge in U.K. Budget

(Bloomberg) -- U.K. Chancellor of the Exchequer Philip Hammond is resisting pressure to drop his fiscal targets in his budget next week as he seeks to bolster the economy for another year of uncertainty ahead of Brexit.

With government debt set to peak as a share of gross domestic product next year, Britain will be in a position to start building up resilience as the Treasury works toward balancing the books, according to a government official. Hammond is on track meet his target of keeping structural borrowing below a self-imposed ceiling of 2 percent of GDP in 2020-21, the official said.

With Prime Minister Theresa May’s leadership in crisis, and the Conservatives under pressure to revive their standing with an increasingly disillusioned electorate, many in the party have urged Hammond to ease his grip on spending.

But his scope for maneuver is limited, with a much weaker outlook for productivity expected to wipe out a significant chunk of the 26 billion-pound ($34 billion) margin set aside to help Britain navigate Brexit. Britain had its credit rating cut by Moody’s in September, and the chancellor fears that abandoning the fiscal rules he set himself only a year ago would do further damage in the eyes of investors.

May hinted at imminent steps to buoy housebuilding as she pledged on Thursday to “build more homes, more quickly.” Communities Secretary Sajid Javid, meanwhile, will announce measures to give housing associations, which are nonprofit providers of social homes, “a stable investment environment to build more” by removing their debts from the government balance sheet.

More Needed

“For decades we simply have not been building enough homes, nor have we been building them quickly enough, and we have seen prices rise,” May will say in a speech in London. “The number of new homes being delivered each year has been increasing since 2010, but there is more we can do.”

There may also be budget help for the National Health Service, whose chief executive, Simon Stevens, made a direct plea to May and Hammond this month, warning more funding was needed urgently.

Still, the chancellor is set to continue favoring smaller, targeted measures rather than delivering the radical moves some in his party have been pushing for. 

Hammond is expected to sound a note of optimism over the economy’s better-than expected performance over the past year. Economists predict the deficit this year will come in below what officials forecast in March. Some of that is expected to carry through to subsequent years, meaning borrowing will be lower than it would be otherwise.

©2017 Bloomberg L.P.