U.K. Chancellor of the Exchequer Philip Hammond laid out a somber framework for post-Brexit Britain, slashing the forecast for economic growth in 2017 and saying the government will need to borrow more over the next five years partly as a result of the vote to leave the European Union.
Outlining his Autumn Statement to Parliament on Wednesday, five months to the day after Britain opted to quit the EU, Hammond said the Office for Budget Responsibility now sees economic growth next year of 1.4 percent instead of the 2.2 percent forecast in March. The cumulative budget deficit will also widen, with just under half the extra 122 billion pounds ($151 billion) foreseen through 2021 — 58.7 billion pounds — a direct result of the referendum result, the Treasury said in documents published to accompany Hammond’s statement.
The vote to leave the EU “will change the course of Britain’s history,” Hammond told the House of Commons. “But it’s a decision that also makes more urgent than ever the need to tackle our economy’s long-term weaknesses,” including a productivity gap, a housing shortage and a “damaging imbalance in economic growth and prosperity,” he said. “Our task now is to prepare our economy to be resilient as we exit the EU and match-fit for the transition that will follow.”
In his first budget statement since he was appointed by Prime Minister Theresa May in the wake of June’s Brexit vote, Hammond cited heightened economic uncertainty and a weaker pound for the clouded outlook. The OBR said the economy has less potential for sustainable growth as a result of the decision to quit the bloc.
While seeking to help low and middle-income families and chart a course for fiscal discipline, the deteriorating outlook left him little room for major fiscal giveaways, and the market reaction was muted.
The pound climbed briefly as Hammond was on his feet before resuming its decline, and was down 0.3 percent at $1.2382 as of 3:04 p.m. in London. U.K. government bonds slid, pushing the 10-year yield 10 basis points higher to 1.47 percent.
The economy has proved unexpectedly resilient to the referendum result, and the OBR revised its 2016 growth forecast to 2.1 percent from 2 percent. But cracks are already appearing. Employment growth is slowing and household incomes are starting to come under pressure as the falling pound spurs inflation.
The government is no longer trying to deliver a budget surplus by 2020, Hammond said, but he pledged to “balance the books” early in the next parliamentary term from 2020 to 2025.
“A credible fiscal policy remains essential for maintaining market confidence and restoring the economy to long-term health,” Hammond said. “The prime minister and I remain firmly committed to seeing the public finances return to balance as soon as practicable while leaving enough flexibility to support the economy in the near term.”
The chancellor outlined a new Charter for Budget Responsibility, committing the government to return the public finances to balance as soon as possible, to cyclically adjusted borrowing at less than 2 percent in 2020-21 and to a cap on welfare spending set by the government and monitored by the OBR.
Hammond’s statement “highlights the damage that Brexit will likely cause,” James Knightley, an economist at ING Bank NV in London, said in an e-mail. “We are more pessimistic on GDP growth than the government” and expect borrowing to be higher, he said. “Therefore we see a real risk that these new rules, much like Gordon Brown’s Golden Rule and George Osborne’s fiscal rules, will be missed.”
Hammond said he would keep to planned cuts in corporation tax to 17 percent by 2020 to help spur growth and said the government will maintain its commitments to the oil and gas sector made in previous budgets. Loopholes allowing multinational corporations to avoid tax will also be closed, he said, to increase fairness for British employers.
“I know how much business values certainty and stability, and so I confirm today that we will stick to the business-tax road map we set out in March,” he said. The government will also tackle the “understandable public concern that the pitch is tilted in favor of large multinational groups which are able to use cross-border structures to manage their tax liabilities.”
Companies will no longer be able to avoid tax by borrowing excessive amounts in the U.K. to pay for overseas activities, raising an extra 5 billion pounds, Hammond said.
The Treasury will provide 1.4 billion pounds to help build 40,000 new homes and 2.3 billion housing infrastructure fund will “unlock” land for building new homes, Hammond said. London will receive the bulk of the investment with 3.15 billion pounds being put aside for the building of over 90,000 homes in the capital. A gauge of U.K. homebuilders rose before dropping. Redrow Plc and Persimmon Group Plc fell at least 1.9 percent.
National Express Group Plc and FirstGroup Plc advanced on Hammond’s plan to invest an additional 1.1 billion pounds in English local transport networks.
The chancellor announced investment in infrastructure, including roads, rail and high-speed broadband, to help boost productivity. A National Productivity Investment Fund will make 23 billion pounds available for innovation and infrastructure over the next five years, he said.
“The productivity gap is well known, but shocking nonetheless,” Hammond told lawmakers. “It takes a German worker four days to produce what we make in five, which means, in turn, that too many British workers work longer hours for lower pay than their counterparts.”
Opposition lawmakers poured scorn on the measures announced by the chancellor, accusing him of failing to tackle the risks to the economy caused by Brexit and overseeing a continuation of six years of failure to meet targets.
‘The figures speak for themselves — growth down, wage-growth down, business investment down, and their own deficit target failed,” John McDonnell, the economy spokesman for the opposition Labour Party, told the Commons in his response to Hammond. “There are just no new ideas here, just a promise to deliver what they previously failed to deliver on. This is press-release policy making.”
In a flourish at the end of his speech, Hammond appeared to be about to announce his resignation before revealing that he is ending the practice of making an Autumn Statement, switching instead to a full-scale Budget in the fall.
“This is my first Autumn Statement as chancellor. After careful consideration, and detailed discussion with the prime minister, I have decided that it will also be my last,” Hammond said. “No other major economy makes hundreds of tax changes twice a year, and neither should we. So the spring Budget in a few months will be the final spring Budget. Starting in autumn 2017, Britain will have an autumn Budget, announcing tax changes well in advance of the start of the tax year.”