Hammond May See His Brexit ‘Deal Dividend’ Rise to $27 Billion
(Bloomberg) -- U.K. Chancellor of the Exchequer Philip Hammond could next week offer the country an extra 5 billion pounds ($7 billion) to end austerity, but only if Parliament backs a Brexit deal with the European Union.
Hammond is expected to receive the windfall to his Brexit war chest when he presents his Spring Statement on Wednesday. He says backing Prime Minister Theresa May’s deal would release extra cash for public services that’s currently held in reserve to mitigate the fallout from a no-deal split.
The forecasts are based on an orderly exit from the EU and would increase his fiscal buffer from 15.4 billion pounds to about 21 billion pounds, according to analysis by Bloomberg Economics.
The war chest has been bolstered by a combination of stronger than expected public finances data for this financial year and a lower debt-interest bill, which means borrowing is likely to be lower in future years, said Dan Hanson. The headroom is the amount by which Hammond is undershooting his fiscal rule to keep the underlying deficit to less than 2 percent of gross domestic product in 2020-21.
Read More: Hammond’s Boon Means Little Without A Brexit Deal
But uncertainty around Brexit means the projections could be quickly rewritten. His statement, based on forecasts from the Office for Budget Responsibility, could be sandwiched between a series of three crunch Brexit votes in Parliament next week, which could dramatically alter the prospects for the economy.
If Britain crashes out of the bloc without a deal, the economy would be smaller, eliminating the headroom, said Hanson.
If May’s deal is voted down on Tuesday, Parliament will be given the opportunity on Wednesday to vote on whether to rule out a no-deal Brexit, followed by a Thursday vote on whether to delay exit day.
“The takeaway is that the chances of things looking materially different to the way they appear now are pretty high. That means the projections and the rhetoric that accompany them should be taken with a large pinch of salt,” said Hanson.
Uncertainty around Brexit means he’s also highly unlikely to want to spend the cash immediately and will instead wait to loosen fiscal policy in the Autumn, said Karen Ward, chief market strategist for Europe, Middle East and Africa at JPMorgan Asset Management.
If the deal is voted down and Brexit is delayed, “markets are likely to end the week broadly where they start since the state of play would be similar to where we are today”, she said in an e-mailed note. “One in which no deal is not acceptable to either side, but the game of brinkmanship looks set to continue until one side bends to a further concession.”
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