The Daily Update - A budget of constraints

As expected, Philip Hammond’s first and last Summer Budget delivered numerous but all modest adjustments to overall government spending. This has been reflected in markets with both sterling and Gilts little changed from before his speech. Beyond the peppered insults towards the leader of the opposition, the most notable mentions were the changes to the OBR’s forecasts.

An estimated £24bn less public sector net borrowing over the current and next 5 years, from more resilient growth and tax receipts, will support the Chancellor’s vision for ‘Getting Briton back to living within its means’. The overall growth forecast over the next 5 years remains little changed, but the trajectory places more of that growth in the current year (2%, up from 1.4% previously) whilst reducing subsequent years’ growth by 0.1%, 0.4% and 0.2% for 2018, 2019 and 2020 respectively.

Attempts to equate the taxation between the employed and self-employed was probably the most significant revenue bolstering announcement, alongside commitments to ‘tackle avoidance, evasion and noncompliance’. Other notable initiatives include the introduction of T-Levels, new technical qualifications; funding for 110 new free schools; counterbalancing measures for the forthcoming increase in small business rates and an overall drive to boost productivity. However, with the vast number of restrictions and protected spending across almost every department, and the Conservative’s election manifesto promising no income, value added or NIC tax increases, these bean-counting adjustments are about as much as could be expected from a Chancellor with his hands tied.

The broad lesson is the increasing challenge of reducing net debt as time passes and new measures to raise revenue or cut spending become increasingly trivial and decreasingly popular. There is only so far a budget can go to counteract decade upon decades of borrowing, with the UK more promising than most. Deleveraging becomes exponentially slower as debts rise: with ever growing interest payments and ingrained civic expectancy for spending beyond means. Even if UK public sector borrowing does decline to £16.8bn by 2021 this will still be a deficit of around 1% - so still technically not deleveraging in absolute terms. But if the OBR growth forecasts are to be believed then debt as a percentage of GDP will then have finally dipped below 80% after peaking at 88.8% in 2018. This is still a long way off the 35% level from 10 years ago: pre global financial crisis.