UK: Budgeting for political matters - Nomura

Analysts at Nomura note that the UK Chancellor Philip Hammond will present his Budget to parliament on 8 March and expect the Budget to be a muted affair following the largesse announced in November’s Autumn Statement.

Key Quotes

“We expect the Chancellor to announce very little in the way of revisions to the fiscal stance in the March 8 Budget. Of course, with an hour’s speech (and the following morning’s newspapers) to fill there will almost certainly be plenty of policy announcements. But we expect that when the measures are totted up they will, in aggregate, amount to neither a significant loosening nor tightening in policy.”

“There are a number of reasons we expect this to be a broadly neutral budget. First, with this being the last spring Budget following the Chancellor’s decision to shift it to the Autumn, we doubt that Mr Hammond will want to make it a big event. Second, the Chancellor had already loosened the public purse strings significantly just three months ago in the Autumn Statement. Third, with the economy proving more resilient than expected, there is less need to engage in stimulatory policy. Fourth, following the previous Chancellor’s efforts to reduce the deficit it is likely that the current government will want to continue to build on this legacy. This can be seen in the adjusted fiscal rules which essentially accept the negative impact that Brexit is likely to have on GDP and thereby public sector receipts, yet at the same time still have a goal in mind for eliminating the deficit.”

“Here are our key takeaways from this Budget Preview:

• Following November’s spending largesse we do not expect any significant further adjustments to the fiscal stance. The risk is for a modest easing given the better-than-expected public finance outturns recently. Indeed, the IFS Green Budget estimates that the Chancellor could afford to loosen the purse strings by £25bn given the more flexible fiscal rules.
• The fiscal rules are notably less strict following the Chancellor’s changes in November. The rules are more vague and in targeting the cyclically adjusted deficit the Chancellor has partially insulated himself against failure to achieve the target due to weaker economic growth.
• Particularly following recent public finance outturns, the UK debt and deficit position looks more encouraging than it did – notwithstanding the potential for an eventual deterioration as Brexit leads to slower economic growth. The deficit is likely to have fallen close to its long-run average this year and the UK has done more than most countries to cut the structural deficit since the crisis.
• Cutting the deficit further, however, may prove tricky given that much of the lowhanging fruit has already been picked. It may prove difficult, therefore, to reduce the residual structural deficit further. The Treasury’s plans announced in November are to reduce the structural deficit on average by around ¾% of GDP per year until 2019-20, following which the pace of austerity slows.
• On the financing remit, we expect an overfund in 2016-17 to lead to lower gross and net issuance in the coming year (2017-18). However, with the Bank of England not expected to restart its APF programme, net issuance after BoE QE could actually rise modestly.
• One issue we have not considered formally in this article relates to the mechanics of Brexit. The divorce procedure may require significant costs to be paid upfront to the EU, but following that the UK will “save” the EU’s annual membership fee. There will inevitably be a Brexit impact on economic growth too, all of which will influence the public finances and thereby Gilt issuance.”