The Daily Update - UK Autumn budget statement

Today, 5 months to the day since the EU referendum, Chancellor of the Exchequer Philip Hammond has delivered the first Budget of the Theresa May Government; the first Autumn Statement to the Commons in light of Brexit. In brief: GDP growth forecasts lower by 0.8% and 0.4% for 2017 and 2018; planned borrowing to increase by £122bn for the next 5 years; some slender support for renters and affordable housing; some mollifying policies for the ‘just about managing’ or JAMS increasing the ‘national living wage’ and tempering some of the Universal Credit reforms; corporate tax will be cut to 17% along with a wide range of new tax reforms; and new fiscal targets of a 2% deficit with debts falling by 2020. Markets saw inflation expectations surge higher; also sterling rallied to 1.2435 during the statement but then fell to 1.2360 before the end of the statement as US data came out.

Before today, Chancellor Hammond had already referenced the UK’s ‘eye-wateringly’ high debt levels, yet today confirmed that borrowing for the next 5 years will increase a further £122bn to fill the black hole that has become apparent since the Brexit vote and increase in debt interest costs, however it will also to help fund a £23bn new ‘national productivity investment fund’ which will incrementally fund projects from transport infrastructure to high-tech innovation.

The Office for Budget Responsibility (OBR) revised UK GDP growth forecasts, which for this year stand slightly higher at 2.1% but only 1.4% for next year, significantly lower than the March 2016 estimate due to ‘lower investment and weaker consumer demand driven respectively by greater uncertainty and higher inflation resulting from sterling depreciation’. Growth estimates remains depressed for 2018, although recovering to 1.7% (0.4% lower than the previous estimate) and remained at 2.1% for 2019 and 2020. This overall reduction in growth expectations follows on from the 0.3 percentage points decrease across the board at last year’s Autumn Statement – which came despite the boost in activity from the lower oil prices and lower interest rates on government debt. These figures correspond with lower forecasts from the Bank of England and the OECD but as always one must bear in mind that “the outlook for productivity growth is both the most important and the most uncertain judgement in most economic forecasts” which, if compounded, the OBR’s infamous fan chart puts an 80% probability for GDP growth to range widely from -1% to 4% by 2020.

Perhaps an interesting technical oddity we noticed is the budget no longer misleadingly accounts for pseudo sterling gains from hedged foreign currency reserves when calculating the Public Sector Net Debt (PSND). Previously it had included such gains in sterling terms on the assets whilst omitting the corresponding losses from the hedging derivatives (from sterling weakness) because of odd Eurostat guidelines; last year this accounted for around £10bn that would have never materialised in the National Accounts and could have perhaps been even more significant for the recent months following Brexit and sterling weakness.

Another take on the UK finances since the Brexit vote comes from the yesterday’s Credit Suisse 2016 Global Wealth Report which estimates that UK household finances are $1.5tn worse off, equivalent to an average $33k reduction in value of accumulated assets per adult. Should Anglo policies continue to diverge alongside potential Trumpflation this in-dollar-terms write-down may just be the beginning for UK residents and investors. The report also calculates a $3.5tn rise in global wealth to $256tn but that this ‘wealth creation has merely kept pace with population growth’ for the first time since 2008. With such population growth slowing and the risks to global trade increasing, overall global growth faces strong downward/sideways pressures that regional pockets of fiscal stimulus and infrastructure spending will likely do little to offset.