What to Look Out for in Hammond's First U.K. Spring Statement

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(Bloomberg) -- At this time of year, the British finance minister is usually preparing to step out of Downing Street brandishing a red briefcase containing his new tax and spending proposals.

This year Philip Hammond has decided to do things differently, moving the main Budget announcement to the Autumn and reducing the Spring Statement one to a handful of forecasts on the shape of the economy that will last less than half an hour.

Perhaps the most interesting forecasts will come after Hammond sits down and the government’s budget watchdog -- the Office for Budget Responsibility -- outlines for the first time the Brexit divorce bill the U.K. may have to cough up. It will be published in an annex to the OBR’s main document.

The British government has agreed to obligations of between 35 billion pounds ($48.7 billion) and 39 billion pounds after Brexit, but the final amount could change depending on the type of arrangement the U.K. manages to negotiate with the EU. How much it fluctuates away from the initial figures flagged back in December could be market moving.

The final bill could be as high as 75 billion pounds or as low as 25 billion pounds over the forecast period depending on how hard a Brexit the U.K. and EU ultimately negotiate, says Simon French, chief economist at Panmure Gordon & Co Plc.

Read More: The Brexit Bill and Why Britain Has to Pay

The EU has yet to put a final number on the bill but has been asking for at least 60 billion euros ($74 billion). Its officials have long said any final figure would be camouflaged to help the U.K. government sell the unpopular settlement to skeptical voters.

“We can safely assume the OBR will probably skew the 39 billion pound or so divorce cost towards end of the forecast period from 2020 onwards, so effectively ends up being 10 billion pounds a year for say six years or more,” said David Owen, chief European economist at Jefferies Group LLC.

With Hammond expected to announce government borrowing is now back to pre-financial crash levels, he’s facing calls to end more than seven years of austerity. He said on Sunday there’s “light at the end of the tunnel” but ruled out any public spending announcements or tax changes today. Instead, he’s set to pave the way for some consultations with a view to further details being announced in the Autumn Budget and a spending review in 2019.

The budget deficit in the current fiscal year alone may come in as much as 10 billion pounds lower than what the OBR predicted four months ago.

Resisting demands for an immediate spending boost means it’s going to be a long eight months for Hammond as the opposition Labour Party steps up its attacks, accusing the government of damaging frontline public services from schools and the National Health Service to policing.

Labour has criticized Hammond’s predecessor George Osborne for “crowing” over the borrowing numbers when local governments are struggling and pay increases for millions of public-sector workers remain capped well below the current rate of inflation.

Hammond insists austerity isn’t a political decision and that the U.K.’s debt level doesn’t give the country enough resilience against potential shocks, like a recession. He wants to get debt down to below 60 percent of gross domestic product, from 86 percent of GDP today. It was at just 35 percent of GDP before we went into the 2008 financial crisis, he said on Sunday.

So, while the OBR is likely to issue a modest upgrade to the economic outlook, Hammond is likely to reiterate the need for a “balanced approach” that sees the deficit continue to fall toward zero in the coming years without starving vital services of funds.

©2018 Bloomberg L.P.

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