With the first post-Brexit budget to be delivered tomorrow, the Chancellor of the Exchequer, Philip Hammond, clearly has a lot of priorities to juggle as well as numerous unknowns to try and accommodate for. Preparing a ‘war chest’ for Brexit alongside supporting ailing public sectors (like the prisons and NHS which have received lots of negative press recently) will be challenging enough. Achieving this whilst, ‘making steady progress in eliminating the deficit’ will be significantly more challenging. Yet this is what The Chancellor has promised, also warning that ‘there are still some voices calling for massive borrowing to fund huge spending sprees. That approach is not only confused, it’s reckless, unsustainable and unfair on our young people who would be left to deal with the consequences.’ At around £26k owed for every British citizen, it is hard not to agree.
Thankfully fresh forecasts are expected to provide around £10bn of additional funding for the current year’s treasure chest and as much as £30-40bn over the next 4 years. This should afford some wriggle room; if the accompanying budget yields effective measures to boost productivity and the adjustments in taxation push revenue up the Laffer curve then the £1.7tn public debt pile may begin to erode, over multiple decades. But this is obviously dependent on the broader economy, and there are increasing portents of growing vulnerability and slowing momentum.
The latest warning signal for the UK is a jolt downwards in consumer confidence: which at the turn of the year seemed surprisingly promising. Now however, household money and unsecured debt is down, along with new car registrations (-4.4% yoy) and retail sales (2.6% yoy, down from almost 8% 3 months prior). All this in combination suggest that Brexit uncertainty and the weaker pound are finally beginning to take bite. Looking beyond whatever the Budget has in store for us tomorrow, with so many unknowns, it is challenging for anyone to forecast how effective the proposals will be; thankfully the UK has a respected government, central bank and independent budgetary office, as well its own currency. Not all debtors are so fortunate.
Such is the increasing challenge of deleveraging in the current environment of slower global growth and a plethora of other indebted countries and governments attempting to do the same. Even though the UK’s Net Foreign Debts are only around 30% of GDP the public sector debt has continued to hover close to 100% for the past 5 years despite all the spending cuts and lower borrowing costs. It’s hard to imagine the reality of indebtedness for other countries where debts are proportionately much higher than that of the UK’s but have been sustained through artificial measures and ‘temporary’ bailouts. When superior yields are available from higher rated securities from creditor or less indebted regions, attractive value investments in the UK are few and far between and practically non-existent in those nations we consider unsustainably indebted: those with Net Foreign Debts in excess of 50% of GDP.