- The UK budget will be delivered on Wednesday, March 8 at 12.30 p.m. GMT.
- Analysts are expecting a “low-key affair.”
- Growth forecasts are likely to be upgraded, borrowing forecasts likely to be cut.
- NHS funding and business rates reliefs are also likely.
LONDON — Philip Hammond will deliver his first budget since becoming British Chancellor on Wednesday, with analysts expecting a relatively modest affair.
Hammond will step up to the dispatch box in Parliament at 12.30 p.m. GMT (7.20 a.m. ET) on Wednesday, March 8. It is his first budget since becoming Chancellor last July but his second major fiscal statement, following last November’s Autumn Statement.
The biggest headline from the Autumn Statement was a relaxing of fiscal targets, as Hammond ditched predecessor George Osborne’s commitment to reach a budget surplus by 2020. This gives Hammond more financial wiggle room to deal with any Brexit-related economic headwinds.
BI has combed through preview notes from UBS, JPMorgan, Morgan Stanley, Goldman Sachs, and Deutsche Bank to find out what the market is expecting from this year’s budget. Here are the key takeaways:
Growth up, borrowing down
“The main focus at next week’s Budget is likely to be a large upgrade to the OBR’s 2017 growth forecast,” says JPMorgan’s Allan Monks. He is expecting the Office for Budget Responsibility to up its GDP growth forecast for this year from 1.4% to 1.9%. Other analysts are predicting a similar rise. It follows a string of better than expected economic numbers since last June’s Brexit vote and momentum since last November’s Autumn Statement.
As a result of better-than-expected growth, most analysts are expecting a downgrade to borrowing forecasts and an improvement of public finances as the Treasury takes in more tax. This could free up between £10 billion and £15 billion a year for Hammond to play with, depending on which analyst you’re reading.
However, most are expecting Hammond to use the bulk of this cash to boost the government’s £27 billion war chest, which the Chancellor has set aside to deal with any unexpected Brexit headwinds over the next few years. He warned ministers last month that there is “no pot of money under my desk,” suggesting he is unwilling to spend much.
Morgan Stanley’s Jacob Neil, Melanie Baker, and team said: “Our judgment is that [Hammond] will seek to bank two-thirds of the improvement, reducing the deficit by about £10 billion per annum, to strengthen the capacity to respond to a possible Brexit slowdown — not least since growth so far has been resilient and he has another near-term opportunity to act in the autumn Budget, if required.”
‘Ease the squeeze’
However, Morgan Stanley expects Hammond to spend the rest of his excess billions on “additional spending to ‘ease the squeeze’, softening the 2% per annum fall in real spending per capita embedded in current plans.”
Deutsche Bank thinks this will mean “more NHS spending, funds for social care and possibly also a relief for small businesses against the planned increase in business rates.”
Social care and NHS has become a huge issue over the last year, with both sectors facing crippling shortfalls in budgets. Some spending, even if tokenistic, on these issues would be well received. The press and businesses have also been vocal in attacking the new business rates regime.
Morgan Stanley’s Baker and Neil add: “We see scope for additional funding to implement the housing white paper vision of additional housebuilding.” Cabinet member Sajid Javid delivered the white paper last month.
Morgan Stanley expects these aggregate spending measures will amount to a maximum of £5 billion and will be fiscally neutral, i.e. totally funded by improved public finances rather than borrowing.
Possible surprises: self-employed taxes, diesel
Beyond headline-grabbing measures on the NHS and business rates, could the budget yield any surprises?
Goldman Sachs writes: “On the tax side, there is a reasonable chance the Chancellor changes the tax treatment of self-employment which currently incurs a much lower rate of national insurance contributions than employees. We believe this anomaly will eventually be addressed by HM Treasury and that may begin in this Budget.”
The Institute for Fiscal Studies recently calculated that the self-employed enjoy a £1,240 tax advantage over employees, calling the current system “costly, inefficient, and unfair.”
Goldman adds that “incentives to encourage the early trading-in of diesel-fuelled cars may also be on the cards,” given that air pollution and smog have become big issues this year, with London already breaching its annual limit.
However, analysts are less sure of what to expect than in past budgets. Morgan Stanley said: “The government has made less use of pre-Budget briefing than Osborne and the Cameron government, and there is a higher-than-usual level of uncertainty around the economic outlook, given Brexit. Both factors make forecasting government fiscal decisions more challenging.”
Despite Hammond’s silence on possible giveaways, analysts are not expecting the kind of “rabbit out of the hat” surprises that typified George Osborne’s budgets. Deutsche Bank says: “Hammond’s intention is for UK fiscal policy to become more “boring”,” and JPMorgan say they expect a “low-key affair.”
Hammond signalled at the last Autumn Statement that he is scrapping the tradition of twice-a-year financial updates, instead moving the full budget to autumn and making it the only annual update. As a result, this spring budget is something of a stop gap.
Goldman writes: “We do not expect the Budget to be a major macro or fiscal event… there may be more news from the Budget at a sector level in terms of both tax and public spending announcements, although here too our expectations are modest.”
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