UK Budget Tightened, 2017 Growth Forecasts Revised Higher

Mar 10, 10:06 am
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Philip Hammond, Chancellor of the Exchequer of the United Kingdom. Image via World Economic Forum

The British Finance Minster, Philip Hammond delivered his spring budget on Wednesday, marking the last budget release before the UK government begins the Brexit talks with the EU.

Britain’s growth forecasts for the economy this year was raised to 2% but revised lower over the next three years, according to the Office for Budget Responsibility (OBR). The upward revision to this year’s economic growth followed a pattern in the recent UK data which has been consistently revised higher although the post-Brexit scenario remains gloomy.

Growth forecasts for 2019 and 2020 was revised lower compared to the previous forecasts given in November. For 2017, growth is expected to average around 2%, from 1.4% previously.

The key points from the budget on its forecasts were:

  • debt of 88.6% in 2016/2017 is expected to rise to 88.8% by 2018 before it is expected to fall to 79.8% by 2021/2022
  • borrowing is expected to rise to 40.8 billion GBP in 2018/2019 and expected to fall to 16.8 billion by 2021/2022
  • Budget deficit of 2.6% of GDP expected for 2016/2017 and expected to fall to 0.9% by 2021/2022
  • Economic growth projected at 1.7% in 2019, 1.9% in 2020. 2017 growth forecasts raise to 2% from 1.4%
UK Growth Forecasts, Revised March 2017 (Source: ONS, OBR)
UK Growth Forecasts, Revised March 2017 (Source: ONS, OBR)

Growth in the UK was expected to fall sharply after the EU referendum that was held in June last year. However, growth managed to beat the odds and came out 1.8% on an annualized basis for 2016. Incidentally, it was also higher than all other G7 countries with the exception of Germany.

However, the optimism failed to buoy the UK Chancellor as he announced a tighter budget, outlining plans to narrow government balance sheets ahead of the key exit negotiations with the EU.

Among many things, the tax hike for self-employed was the most widely discussed point as it is expected to potentially hit 2.5 million Britons. A large social care fund was also set out but was undermined by the OBR which said that the government was unlikely to meet its stated fiscal objective.

The Chancellor refused to speculate on whether there will be any tax cuts for businesses to make investments more attractive if no deal was reached with the EU.

“People can read what they like into it. I’m not going to speculate now on how the UK would respond to what I don’t expect to be the outcome,” Hammond said during an interview on the BBC’s Andrew Marr Show.

The main points of the March 2017 Budget were:

  • £2bn for social care services in England, and help for firms hit by business rate rises.
  • Increased National Insurance bills for self-employed people
  • Personal tax-free allowance to rise as planned to £11,500 this year and to £12,500 by 2020
  • No changes to National Insurance paid by the employed and employers or to income tax or VAT

The Office for Budget Responsibility said in its executive summary that the government’s Public sector net borrowing would be significantly lower this year, more than the initial forecasts and this could keep the government on course to meet the structural borrowing targets for 2020/2021. The OBR attributed the lower PSNB to one-off factors and the timing.

The OBR was however cautious in its assessment noting that real GDP could moderate during the first half of this year with inflation putting a squeeze on household budgets and consumer spending.

Source: http://www.ukpublicspending.co.uk

With wage increases unable to keep track with the pace of increase in inflation, policy makers are expecting to see a near-term slowdown in the economy especially as consumer spending is expected to fall.

For its part, the Bank of England, which will be meeting next week is expected to stay on the sidelines, with no changes coming out from this month’s meeting. However, the initial optimism that rising inflation could see the central bank respond with a rate hike is starting to fade.

The Bank of England, in February noted that the risk was balanced at the moment and that rates could move in either direction. The BoE’s monetary policy meeting is due next Thursday, March 16th.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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