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No Big Bang in Pre-Brexit Budget

Europe

The “last spring Budget” did not bring about big novelties, as the Chancellor remains cautious in the weeks preceding the triggering of Article 50.

Apart from an increase in the National Insurance Contributions for self-employed workers, all other announced measures appear to be of very little significance in the grand scheme of things. Even the GBP 2bn increase (over three years) in social care funds and the additional funds pledged for the NHS, “free schools” and productivity-enhancing projects appear to be cosmetic measures. In fact, the net impact on public finances of the announced policy decisions (from both the taxation and the spending fronts) is extremely limited, and well below GBP 1bn in each tax year from 2018-19 to 2021-22 (while being a “whopping” GBP 1.7bn in 2017-18).

In this context, the most interesting news about this last Spring Budget (in the intentions of the Chancellor, next fiscal year the “Autumn Statement” will become the Budget, followed by a “Spring Statement”) did not come from the Treasury, but from the OBR, which revised UK’s growth projections upward, and borrowing needs downward. This means that the government will be able to maintain a GBP 26bn buffer to be used to cushion the impact of Brexit on the UK economy.

There are two main reasons for this lack of substantial news. First, the real shift in the fiscal framework was made by Theresa May’s government with the Autumn Statement of November 2016, when a significant relaxation in fiscal targets was announced (in particular, to achievement of a balanced budget was moved to next parliament). So, this budget could only be conceived as a continuation of the announced strategy back then.

Secondly, one could not expect any meaningful shift in fiscal policy in the weeks preceding the triggering of Article 50, which will mark the formal beginning of the Brexit process. The most relevant objective was to preserve the “fiscal buffer” the government can (theoretically) tap from, in case the divorce from the EU proves a harder process than currently expected. To put figures into context, the EU Commission is said to be thinking to a possible EUR 60bn “divorce bill” to be presented to the UK just to begin any negotiation.

This means that even Hammond’s prudent approach might not be enough to ensure an easy ride for the UK, post-Brexit. Especially as the debt-to-GDP ratio will continue to increase to around 89%, before edging lower (assuming the OBR’s growth projections prove correct). All this uncertainty is reflected in the weakness of GBP, which remains under pressure against both the EUR and USD. Further weakness could be expected after the triggering of Article 50, in the next few days.