The hardline Brexit camp does not trust Hammond - BBH

"The UK Chancellor of the Exchequer Hammond is set to deliver his first Autumn budget tomorrow, and it could be his last," BBH analysts argue.

Key quotes

The UK government is fragile.  Infighting is notorious.  It appears the hardline Brexit camp does not trust Hammond.  A cabinet reshuffle is widely rumored, and Hammond seems vulnerable. Prime Minister May, who also initially was in the Remain Camp, is said to regard Hammond suspiciously.

Hammond is understood to be fiscally conservative, but he is hemmed in by the slowing economy, Brexit uncertainties, and a weak government.  His proposal in the spring to have small businesses pay more for National Insurance fell flat, and it was quickly retracted.  Another faux pas and his fate in the government could be sealed.

The UK government is already on the hook for GBP500 mln for the next two years for Northern Ireland as the price of the Democrat Unionist Party that lends support to the Tory government that lost its majority.  The government is committed to lifting the 1% cap on the salaries of some public sector employees.  The ceiling on university tuition fees will be frozen next year, and the earnings limit before student debt needs to be repaid is expected to be increased.   

While important for selected constituencies, the budget is expected to be small beer.  Projections of weaker productivity translate into weaker growth, which in turn weighs on revenues and gives the Chancellor little room to maneuver without boosting the deficit.   Last year was the first year since 2007 that the UK recorded a budget deficit less than 3% of GDP.   It is expected to be little changed this year.  

The most important element of the budget is not about economics but politics.  Many observers see the budget as one of the last opportunities the Tory government has to bolster its support.  Reports suggest that as many as 40 Tory members of Parliament are prepared to sign a letter of no confidence in May, eight shy of the threshold to trigger a leadership challenge.  Given the difficult straits that any government would find itself, it may be a poisoned chalice.  Many investors fear that the only thing worse than the Tories would be a Labour government.