Philip Hammond’s inaugural autumn statement will be punctuated by ballooning government borrowing and slowing economic growth as Britain moves towards the European exit door.
In his first major set piece next week, the chancellor of the exchequer will be tasked with squaring prime minister Theresa May’s push to help cash-strapped households by tackling a troubled economic outlook fuelled by Brexit uncertainty.
Mr Hammond has already abandoned the economic direction plotted by his predecessor, George Osborne, whose aim of achieving a budget surplus by 2020 was scrapped by Ms May.
Free from these austerity measures, the chancellor will have greater flexibility to tackle the challenges that lie ahead – despite the prime minister pledging that her government will be fiscally responsible.
Constraints posed by the dismal state of the public finances will be chief among Mr Hammond’s concerns, as he looks to shield the UK economy against slowing growth with reduced spending power.
The latest figures show the government borrowed a higher-than-expected £10.6 billion (€12.3 billion) in September.
For the financial year to date (April to September), borrowing excluding banks fell by £2.3 billion to £45.5 billion, compared with the same six months in 2015.
High borrowing
A closer look at the state of the UK’s public finances will come on Tuesday, with some economists expecting borrowing excluding banks to hit about £6 billion in October.
While this would be narrowed from £6.4 billion a year earlier, it will mean the Mr Hammond can only borrow £4 billion for the rest of the financial year if he is to meet the latest Office for Budget Responsibility’s forecast of £55.5 billion (€64.5 billion) for 2016/17.
PwC warned last Tuesday that government borrowing was more likely to hit £67 billion for this financial year and overshoot forecasts by £100 billion by 2021.
Despite having less cash to play with, next week’s statement is likely to herald more money for infrastructure as the chancellor takes advantage of the cheap cost of borrowing.
Howard Archer, chief UK and European economist at IHS Markit, said Mr Hammond has hinted that he will prioritise infrastructure and housing measures to help support the economy.
“The chancellor has already indicated that an additional £2 billion will be earmarked to tackle the housing shortage on top of a £3 billion house-building fund that has already been targeted at small- and medium-sized developers, offering cheap loans or financial guarantees,” he said. “There are also plans to cut red tape.”
Mr Hammond will have taken some comfort from the resilience of the UK economy in the wake of the Brexit vote, with third-quarter GDP defying expectations of a sharp slowdown to grow 0.5 per cent from 0.7 per cent in the second quarter.
Earlier this month, the Bank of England revised up its forecast for GDP over the next two years from 2 to 2.2 per cent for 2016 and from 0.8 to 1.4 per cent in 2017. However, it slashed it for 2018, to 1.5 per cent from 1.8 per cent.
Tax cuts
With tax receipts set to suffer a blow as Brexit uncertainty applies the brakes to economic growth, the chancellor may struggle to introduce fresh tax cuts in his autumn statement.
While Mr Hammond agreed to honour planned cuts to corporation tax from 20 per cent to 17 per cent by 2020, Mr Osborne’s plans for a further reduction to below 15 per cent now look a distant hope.
However, the chancellor will still come under pressure from Ms May to find room to help squeezed households facing rising costs from soaring inflation triggered by the Brexit-hit pound.
Inflation eased back to 0.9 per cent in October from 1 per cent in September, but Bank of England governor Mark Carney said Britons should not to be fooled: a sharp rise in the cost of living is coming, he warned.
The bank kept interest rates on hold at 0.25 per cent in November after cutting them from 0.5 per cent in August. It predicts that inflation will nearly treble over the next two years, shooting up to 2.7 per cent for 2017 and 2018.
