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Tougher Brexit challenge in UK.


Britain’s economy
is likely to feel the pain of Brexit more sharply in the coming years
despite holding up well so far, according to finance minister Philip
Hammond’s latest plan to steer the economy through its split from the
European Union.

Hammond,
announcing an annual budget shortly before Britain is due to launch its
Brexit divorce process, said the world’s fifth-biggest economy had so
far “continued to confound the commentators” by withstanding the
referendum shock.

The
economy is on course to grow by 2.0 percent in 2017, up from a forecast
of 1.4 percent made in November, according to official forecasts.
But
growth from next year to the end of the decade would be weaker than
previously thought and would only return to 2.0 percent in 2021.

Faced
with that outlook, Hammond said he would stick to his plan to bring
down what remains one of the biggest budget deficits among the world’s
rich nations.
“The only
responsible course of action … is to continue with our plan,
undeterred by any short-term fluctuations,” he told parliament.

However,
the Office for Budget Responsibility (OBR) which provides the official
forecasts that underpin the budget, said Hammond’s plans did not look
ambitious enough for him to meet his goal of balancing the budget in the
early 2020s, especially given rising healthcare costs from an aging
population.

To address
the challenge of taxing the growing number of self-employed workers,
Hammond said they would pay a higher rate of national insurance
contributions, angering some who accused the government of breaking the
spirit of an election promise.

Kevin
Nicholson, head of tax at PwC, said the government had found a way to
raise more revenues after promising no increases in conventional income
tax. “This has opened up a big potential money spinner,” Nicholson said.

Hammond
also made it harder for directors and owners of small firms to take
tax-free money out of their companies, by cutting a dividends allowance,
which will also hurt Britons with big share investments outside
tax-protected pension schemes.

To address one of the most visible
strains on public services, he announced a 2 billion-pound increase in
funding for social care over the next three years.

But all new spending commitments were funded by his budget plan, he said, meaning no extra borrowing to pay for them.

Since
becoming finance minister last year, Hammond has eschewed budget
gimmicks and instead wants to build a reserve fund in case the economy
needs help as Brexit plays out.
In his speech to parliament, he joked that he had to defend his nickname “Spreadsheet Phil”.
“If
the economy weakens over the rest of the year or the Brexit
negotiations get tricky, we can expect some of this ammunition to be
spent in this year’s November budget,” David Tinsley, an economist with
Exane BNP Paribas, said.

SLOWER BORROWING, HELPED BY 2017 WINDFALL

The vote in June to
separate Britain from the EU, which buys about half of its exports, had
been expected to deliver an immediate and heavy below to the economy.

Instead,
consumers continued to spend and helped gross domestic product to grow
by 1.8 percent in 2016, faster than all other Group of Seven economies
bar Germany.

Signs are now
emerging that shoppers have turned more cautious as inflation rises,
pushed up by the tumble in the value of the pound following the
referendum. And the uncertainty about Britain’s ties with the EU is
likely to make some companies wary about long-term investments.

But for this year, the news in Hammond’s budget was upbeat.
The
stronger-than-expected economic growth since June means Britain’s
budget deficit is likely to fall faster than previously thought in the
current financial year to just under 52 billion pounds, or 2.6 percent
of GDP – a nine-year low.

The
OBR now expects the government will need to borrow 23.5 billion pounds
less from 2016/17 to the 2020/21 financial year than it projected in
November.

However, most of
that was due to the sharp improvement in the 12 months to the end of
March this year, underscoring the challenge further ahead.

Economists said the forecasts did not include the risk of a hefty divorce bill for Britain when its leaves the EU.

The public finances are still expected to be in the red by the 2021/22 financial year, the last in the OBR’s forecasts.

That
represents a slower pace of deficit reduction than Hammond’s
predecessor, George Osborne, planned a year ago, when he hoped to return
the public finances to surplus by 2019/20.

 

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