Budget Preview: Chancellor Philip Hammond's Impossible Task To "Square The UK's Circle"

Tyler Durden's picture

At lunchtime today, Philip Hammond will give the weakened Conservative government’s first budget in the new parliament.

Against a likely backdrop of downgrades for the economy from the OBR, the Chancellor will be under immense pressure to provide a sound plan going forward on many issues. As Statista's Martin Armstrong notes, the NHS has already had its call for an emergency boost of £4 billion rejected, but there will need to be at least some answers to the problems surrounding health and public services funding.

As a new survey by ComRes shows, this topic is one of particular importance to the public, with 67 percent saying that there should be more investment in these services, with a slight majority even saying they would personally be prepared to pay more taxes to enable it.

Infographic: Budget 2017: more money for public services, please | Statista

Clearly, this is a highly significant budget and we would be greatly surprised if it’s considered a success. As we noted yesterday, Reuters columnist and former European economics editor of The Economist, Paul Wallace, believes:

Few British budgets have mattered as much as the one that Philip Hammond will deliver to the House of Commons on Nov. 22. The chancellor of the exchequer must shore up Theresa May’s perilously shaky government ahead of a vital Brexit summit of European leaders in mid-December. At the same time Hammond has to keep a grip on the public finances.

However, it’s worse than that, as the Chancellor is also under pressure from senior members of the Conservative party, never mind UK citizens, to increase spending amid widespread fatigue with austerity. Here is the Financial Times on the stiff challenge Hammond is facing.

UK Chancellor Philip Hammond is under pressure from all sides as he prepares to deliver his second Budget on Wednesday. The first Budget of a new parliament is traditionally the time for chancellors to take bold decisions about taxes and spending. But the economic forecasts are likely to be difficult, public services are under strain, and pro-Brexit MPs are increasingly turning on the chancellor over his support for a “soft Brexit”. If Mr Hammond produces a safety-first Budget, he squanders his opportunity to decisively shape Britain’s future. But boldness risks backfiring, and steering a middle course threatens to satisfy nobody.

The FT notes that the Chancellor’s statement will “serve a cold dish of downgrades for the UK economy” from the independent “Office for Budget Responsibility” (OBR). This year’s growth forecast is expected to be cut from 2.0% to 1.6% and for 2018 from 1.6% to 1.4%. The medium-term forecasts depend on the OBR’s assumptions on productivity growth, which it has already flagged will be cut “significantly”. The FT expects that.

That means growth figures for 2020 and beyond will be closer to 1.5 per cent a year, compared with the 2 per cent that the fiscal watchdog had previously forecast.

Paul Wallace highlighted productivity as Hammond’s biggest problem.

But the gravest challenge he faces is economic: Britain’s persistent productivity blight…

 

Other advanced economies have also experienced setbacks to productivity growth following the financial crisis. Where Britain stands out is in the severity of its reverse. The shortfall in productivity is the main reason real wages are now 4 percent lower than 10 years ago, a potent reason why the leave campaign prevailed in the Brexit referendum.

While public finances look slightly more robust in the near-term, the outlook is deteriorating 3-4 years out, as the  FT explains"

Tax revenues have been stronger than expected this year, alongside lower-than-expected public spending. As a result, this year’s expected public borrowing will fall by about £8bn. The debt burden will begin to fall next year, giving Mr Hammond the opportunity to boast that he has turned the corner on public finances. But good news in the short term disappears towards the end of the forecast horizon, as weaker economic forecasts bear down on projected tax revenues. Before any accounting or tax changes, the deficit forecast in 2020-21 is likely to rise by more than £10bn compared with the March forecast. The government has already said it wants to reduce borrowing to under 2 per cent of national income by 2020-21, but Mr Hammond’s headroom is likely to roughly halve, from £26bn to about £13bn, in that year.

However, he does have one thing up his sleeve…an off-balance sheet accounting gimmick.

The chancellor wants to signal that after a difficult year, things are looking up, with debt falling and Brexit-related uncertainties lifting. To offset bad news in the medium-term public finances, he will use a £5bn-a-year accounting change — by taking housing associations’ borrowing off the government’s books — to free up more money for housing, wages and healthcare.

Affordable housing is a major problem for Hammond and Prime Minister Theresa May. According to the FT:

Fixing the “broken housing market” is the government’s biggest domestic priority. The chancellor wants to make rents more affordable and ease the path to home ownership for younger adults who have deserted the Conservative party in recent elections. Mr Hammond has already set a target of 300,000 new homes per year, but has also insisted there is no “single magic bullet” to solving housing problems.

He will announce a housing package on Wednesday that is likely to include commissioning of new building on public land and funding for local authorities to construct homes. He will also reaffirm the Tories’ promise from last month’s party conference to commit £10bn more of Help to Buy equity loans, and set out plans to lower stamp duty for some first-time buyers. There will be no big reform of planning laws for the “greenbelt” of protected area outside of London, but local authorities could be given more powers for compulsory purchase of land.

In its budget preview, the left-leaning Guardian newspaper highlights the deteriorating outlook for public finances due to the productivity problem.

Lower expectations for the output per worker will have an impact on the gross domestic product, cutting the amount of economic output available for taxation. The Institute for Fiscal Studies reckons the downgrade will contribute to a £20bn black hole in the public finances, limiting Hammond’s spending power if he wants to stick to his pledge to remove the deficit by the mid-2020s. John McDonnell, the Labour shadow chancellor, seized on the October data to argue that seven years of spending cuts had “caused pain and misery for millions with little to show for it”.

As if “Fiscal Phil” Hammond didn’t have enough on his plate, he’s also been lambasted for his gaffe that “there are no unemployed people” in Britain, in a television interview at the weekend. Disliked by the pro-Brexit side of his party, Hammond’s budget speech is being viewed by some as the “make or break” moment of his career. We concur.

Meanwhile, Bloomberg has been doing some sleuthing on budget preparations by government departments and think tanks. It identifies six things to look out for when Philip Hammond stand up in parliament to deliver his speech.

The U.K. budget is usually a mixture of measures that have been heavily trailed in the run-up by various government ministers, with a liberal sprinkling of surprises. In the past six months there have been myriad consultations and papers on everything from the offshore oil to air pollution that hint at possible measures in the works. Bloomberg trawled through that documentation, as well as recent announcements, to identify six areas that are likely to get a mention when Chancellor of the Exchequer Philip Hammond lays out his economic blueprint.

1. Stamp Duty and the Housing Crisis
Prime Minister Theresa May last week pledged that it’s her personal mission to “build more homes, more quickly.” To that end, the budget is likely to include a number of measures to encourage construction and enable younger people to get on the housing ladder. Asked on the BBC on Sunday about whether the home-buying tax known as stamp duty would be cut for younger buyers, Hammond declined to discuss tax matters, but didn’t deny he was looking at the measure.

“We recognize the challenge for young first-time buyers, that in many parts of the country deposits are now very large,” Hammond said. “Nobody is saying we’ve done enough. We must do more. We recognize there’s a challenge there and on Wednesday I shall set out how we intend to address it.”

2. North Sea Oil and Gas
Whilst remaining committed to its climate-change goals, the U.K. is also trying to extract as much value from its waning oil and gas fields in the North Sea. The industry is crucial to the economy in Scotland, which would be grateful for any assistance to a financial lifeline even as it remains angry at the Conservatives for taking it out of the European Union.

At the last budget in March, the government published a “discussion paper” that examined allowing transfers of tax history between buyers and sellers of oil and gas assets -- a measure designed to make it easier to buy and sell the fields, and keep them producing for longer. It would allow buyers to get a tax refund as a result of any costs incurred decommissioning the field at the end of its life.

Hammond told the Sunday Times he’s “looking at” a possible change in the tax rules, which is “the No. 1 ask of my Scottish colleagues.” Even so, he did issue a note of caution, adding that the Treasury needs to ensure the reform “is robust and that we don’t inadvertently create scope for gaming on a grand scale in the tax system."

3. Boosting Research & Development
May on Monday said the government aims to increase public and private research and development spending to 2.4 percent of economic output by 2027, and beyond that to 3 percent. “This could mean about 80 billion pounds ($106 billion) of additional investment in the next decade,” she said.

As part of an announcement the same day linked to her government’s Industrial Strategy -- due to be published next week -- she said that would begin with a commitment for an extra 2.3 billion pounds of investment in the 2021-2022 tax year, taking total public investment to 12.5 billion pounds that year. The government also signaled plans for a 1.7 billion-pound fund focused on improving regional transport links.

4. Shale Wealth Fund
In another measure aimed at boosting the fossil-fuel industry -- in this case by making it more palatable to local communities -- the government promised at the last election to overhaul a pledged fund worth as much as 1 billion pounds to distribute some of the profits from hydraulic fracturing.

The aim is to ensure “a greater percentage of the tax revenues from shale gas directly benefit the communities that host extraction sites.” The government last week responded to a consultation on the issue pledging the fund will initially consist of as much as 10 percent of tax revenues from shale-gas extraction, with proceeds to be spent on projects ranging from play parks for children to improved transport links and restoring historical sites.

5. Air Pollution Tax
Diesel vehicles have become a political football of late. For years, governments ignored evidence that diesel is worse for air quality and encouraged its use because the fuel is less damaging to the climate than gasoline. With air pollution now under the microscope in London in particular, the government published an air-quality plan over the summer and is likely to include measures in the budget designed to help clean up the air in Britain’s cities by encouraging cleaner vehicles.

Possible measures include raising the sales tax on diesel cars, known as vehicle excise duty, or raising taxation on diesel fuel itself, which is currently taxed at the same level as gasoline, at about 58 pence per liter. The government has also said it will consider programs to encourage motorists to trade in their older, more polluting cars, for newer, cleaner ones. Ministers also stepping up efforts to encourage the use of more electric vehicles by supporting the development of batteries and the deployment of charging points.

6. Fund for Start-Ups
In August, the government proposed a new National Investment Fund that would help start-ups access the “patient capital” funding they need to develop into so-called “unicorns” -- innovative companies valued at over $1 billion. A consultation on the proposal closed in September, and Hammond is likely to propose a confirmed plan of action in the budget.

The consultation suggested funding should come from the British Business Bank, replacing the backing currently received from the European Investment Fund. One of the reasons this could get a mention is that the the government is keen to demonstrate that London can attract Big Tech even when it’s no longer in the European Union.

Although the view is hardly unique to this government, a mere 22 percent said that they feel taxpayers' money is currently being spent wisely.

Whether this percentage will go up or down after the Chancellor's statement today, remains to be seen.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Rubicon's picture

I think he would garner more support if he had a perm.

eforce's picture

Well ofcourse we aren't going to have any money if you give it all away to the EU you fucking cunts.

Also most if not all pollsters in the UK have a left wing bias.

land_of_the_few's picture

Like King Charles I, perhaps.

TheSilentMajority's picture

The UK doesn't have a pot to piss in. They are broke.

Their phony “budget” is just another name for a check kiting scheme.

They spend most of their growing debt on “free” stuff for welfare bums and illegal migrants, and massive unsustainable anti-terror security expenses.

Bananamerican's picture

"The UK doesn't have a pot to piss in. They are broke."

 

nothing a few hundred thousand more muslim "immigrants" can't solve

JohnGaltUk's picture

Increased taxes more likely.

EddieLomax's picture

The article makes one serious error, there is no austerity in the UK.  We are spending 10's of billion pounds more a year than we pay in tax, while sending 10's of billions of pounds abroad for various schemes that have nothing to do with the UK tax payer.

We are also paying 100's of billions more in welfare payments to people who are not British but are in Britain.

Fix all the above and there is suddenly a large amount of money free for tax cuts and healthcare spending.

Although clearing out all the deadwood management from the NHS would also yeild at least 10 billion in savings, better to privatize it all and just have the government as healthcare provider of last resort (if you have no money or assets only).

JohnGaltUk's picture

Your comments make me laugh mate because it is so true. Every benficiary in this country think they are entitled to an IPhone, teenage women are getting pregnant on purpose because they think they are too precious to work at the Co-op.

I can not wait when the bond bubble bursts and I believe the UK will default on their soveriegn bonds and we all no what that means, the banks will fall to. This will happen all over western Europe, it will be like dominos. What I am looking forwards to, is it should spell the end of socialism and the public will surge to the right and will never trust government again for generations until we get to that generation again where they think they are entitled to free shit.

The only issue you have to watch out for is these vermon who think they are entitled to free shit, they will be very pissed off when the free valve stops. If you look as thou you have more than them, they think you stole it from them and this is what will cause violence. If you have a nice home you may find yourself under attack. So get tooled up if you can. They have been making cuts to the Police and there will not be enough of them like in 2011 when they were bussing them all round the country.

Pandelis's picture

socialism or communism (your pick) is working fine for the chinese.  it has brought out of poverty and raised the standards of living multiple times in one generation for hunderds and hunderds of millions.

 

so, please do not blame it on socialism or communism for that matter.  either system works fine, depends where the money flows it seems to me to be the key to success.  I know that is different from what we have been told all our lives but it seems the facts.

GreatUncle's picture

Think it is more like trying to offload public sector debt onto the private sector.

That was phase one and now I think they are about there.

Then the next phase is to the inflate (interest rates) the economy once again but this time the private sector will not be deflating the debt but forced to honor it.

The government on the other hand pretends it succeeded in bringing the deficit under control.

A defecit that exists because we use a Keynesian policy.

To Hell In A Handbasket's picture

Even if we didn't have welfare bums and immigrants, the ponzi scheme would still collapse, just not so soon and if we didn't plunder the 3rd and developing world and subsidised our standard of living, by stealing from the savages, it would have imploded long ago. 

Our entire neoliberal-neoclassical economic models are a fucking lie and its unravelling as we speak.  The budget is just another parlour trick, with smoke and mirrors. The chancellor gives the plebs a 1 penny in the pound tax break, then lobs 3p on fuel, 12p on wine, 8p on beer, 10% increase on road tax, 1% on stamp duty, then the fucking conservative tory plebs will shout from the roof-tops how the conservatives are the party of low income tax, giving you back more of your hard earned income. Land of hope and glory.......

Yes, a nation gets the government they deserve and no I don't vote for Corbyn. I don't vote for none of them. 

August's picture

Keep Calm...

And Leave the Country

Greenspazm's picture

So what does the UK economy consist of apart from property speculation and financial engineering?

webmatex's picture

TAXES and Consumer Credit at hi %.

land_of_the_few's picture

Anaglypta wallpaper mills.

Hope.

To Hell In A Handbasket's picture

That's so 70's and MFI. Love the new Chipboard chest of draws with fake veneer, in exchange for my 6ft Thomas Chippendale. 

land_of_the_few's picture

Anaglypta's "posh" these days, it used to be used to cover structurally cracked walls because it was so thick :D

You should hang on to that beast if you didn't give it up, it's getting hard to find anything wooden not made of tiny slivers of wood shrapnel bonded together, even expensive stuff.

 

To Hell In A Handbasket's picture

All our furniture is inherited from my Nan who lived in Gloucester. I've even got a piece I painted in yellow gloss, while at university in the early 90's. Yes I thought I was such hipster back then. Thankfully it was nothing the local community service staffed, carpentry warehouse under the railway arches couldn't strip down back to wood for £45. Thank god for Hackney criminals put back on the straight and narrow. While a real antique shop was quoting me £370. 

land_of_the_few's picture

That's awesome, bless those hardworking ex-dodgy geezers!

land_of_the_few's picture

Did you see the thing about the ex-Soviet submarine U-475 someone bought as a tourist attraction?

Apparently pretty hard to find *a dock* in Britain for it. That's Britain, the industrial island, in the sea.

Most docks got turned into waterfront condos or culture / cafe house zones with nice big windows over the shore.... no need to touch any of that icky splashy cold wet stuff, or God forbid, seaweed - eww!

Presumably there are still some free spots on the Clyde or Barrow-In-Furness, but maybe they would laugh a bit at seeing the opposition turning up

css1971's picture

Economists, politicians and journalists (aka the deluded, corrupt and the credulous) all expounding on a chaotic system with 60 million individual moving parts.

Billybullshit's picture

Look, don't take the piss. Im sure all our immigrants will get off benifits as soon as they are able, will stop avoiding taxes and sending all the money home so their twenty relatives can come here and do the same.

The BBC told me they are all hard working.

land_of_the_few's picture

And it's not like they're bringing them in to jack up property prices and keep.pumping the market up for speculators, reduce the political power of the middle class, or undercut locals, no Sirree.

quasi_verbatim's picture

You two are seventy years too late on this.

Greenspazm's picture

Well at least the pound hasn't collapsed due to lack of gold backing as J.G. Ricktards forecast it would in 2011.

Batman11's picture

Neoliberal policymakers are always at a huge disadvantage because they don’t know what they are doing.

The FED can’t see any problems ahead in 2007:

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png

That’s because they don’t know where to look.

Austerity  always works doesn’t it?

The IMF predicted Greek GDP would have recovered by 2015 with austerity.

By 2015 it was down 27% and still falling.

Richard Koo had to explain to the IMF how they had pushed Greece into debt deflation by cutting Government spending.

Their underlying neoclassical economics doesn’t look at debt and assumes the money supply is constant.

The money supply = all the public and private debt in the system

This is the equation that tripped up the IMF with Greece.

With this equation we can begin to see the problem with cutting Government spending to balance the budget.

If this is your only consideration you can easily push the nation into debt deflation due to a contracting money supply.

Before 2008, there was a ridiculous borrowing boom and that debt needs to be paid back, the private sector debt is going down.

The Government borrowing needs to go up to keep the money supply stable.

Richard Koo explains and he’s smarter then the IMF:

https://www.youtube.com/watch?v=8YTyJzmiHGk

He would probably put Philip Hammond in the shade too, a balancing the budget ideologue, who doesn’t know what he doesn’t know. 

Batman11's picture

Richard Koo’s video has the data for the US, Euro-zone and UK and we are doing the worst for private debt and, therefore, in the worst position to cut Government spending.

11 min. - 17 min in video

The Euro-zone is an average, the South, with austerity, will be doing much worse, and the North will be doing much better. The EU’s neoliberal policymakers are doing the wrong thing in the Club-Med, but they don’t know any better.

The London bubblers are in a different world due to inflows of foreign money that are not seen elsewhere.

spanish inquisition's picture

Changing up the game with accounting tricks.

Although it is impossible to square a circle. It is only extremely difficult to cube an oblong spheroid.