Brexit Overshadows Review Meant to Herald the End of U.K. Austerity

(Bloomberg) -- U.K. civil servants preoccupied with Brexit are struggling to find time for the 2019 spending review, a set-piece opportunity for Prime Minister Theresa May to show that almost a decade of austerity is at an end.

Officials in the Treasury are so consumed with planning for a no-deal exit from the European Union that the spending review has already lost steam, according to two people familiar with the matter who asked not to be named.

Chancellor of the Exchequer Philip Hammond will not fire the starting gun on the process in his Spring Statement on March 13, one person said. It could yet begin in the summer and be concluded by the end of the year, so that departments know their funding allocations beyond March 2020.

Brexit Overshadows Review Meant to Herald the End of U.K. Austerity

“The Chancellor has been clear we will conduct the Spending Review this year and this remains the case,” a Treasury spokeswoman said.

With just 57 days to go before the March 29 planned exit day and May still intent on re-negotiating her divorce deal in the face of opposition from the EU, government officials are working tirelessly on minimizing the disruption that would be caused by leaving with no agreement in place.

It’s another sign of government policy being neglected as officials and ministers focus their attention on the relentless quest to end Britain’s 46-year relationship with the EU. One third of the Treasury’s 1,300 staff have been redeployed to work on Brexit.

Reacting to the news, John McDonnell, who shadows Hammond for the Labour opposition, said the Treasury was “in near meltdown” because the chancellor had “failed to staff up his department for Brexit.”

The Treasury needs to lay out contingency plans to protect financial stability and calm markets in the event of a no-deal Brexit. It would also need to allocate funds to boost border security and ensure food and medical supplies.

For financial services alone, the government is working on 53 executive orders as well as a new parliamentary bill that can give ministers the power to deal with legislation that’s still unfinished by Brexit day.

Spending reviews decide the cash each government department gets for capital investment, administration and public services -- areas that account for almost half of all state spending. The last one, announced in 2015, set allocations until March 2020.

In his Autumn Budget, Hammond set out overall spending limits to 2023-24 as he declared austerity was over, with a significant cash boost for the National Health Service.

However, the chaos over Brexit has thrown the outlook into confusion. It is not clear whether the spending review will cover more than just the 2020-21 fiscal year or a more usual four-year period, which would encompass the next election due in May 2022.

Without a deal concluded, the Treasury won’t know what the economy will look like after Brexit. Government analysis sees Britain being worse off under any Brexit scenario, with GDP as much as 10.7 percent lower over 15 years if there’s a disorderly exit.

Hammond has set aside a fiscal buffer of 15 billion pounds ($20 billion), money that may be needed to boost the economy in the event of a no-deal Brexit.

Brexit Overshadows Review Meant to Herald the End of U.K. Austerity

Hammond is under pressure to halt years of spending cuts after May announced an end to austerity during her speech to the Conservative Party conference. She wants to paint a positive picture of the U.K. outside of the EU and win over voters who backed Jeremy Corbyn’s Labour Party in an anti-austerity backlash at the 2017 general election.

Billions of extra pounds for the NHS means other departments face continued tight settlements, though that could change if Britain struck the right agreement with the EU and scooped a “deal dividend,” according to Hammond.

©2019 Bloomberg L.P.