Budget 2018 preview: Chancellor's focus to be on austerity and Brexit
Chancellor Philip Hammond is expected provide details of how the government will end austerity later on Monday, when he delivers his last budget before the UK quits the European Union in March.
The UK has seen deep cuts across all public services, as the government sought to reduce the deficit following the financial crisis. But earlier this month, Prime Minister Theresa May told delegates at the Conservative Party conference: “A decade after the financial crash, people need to know that the austerity it led to is over.” She has also pledged to spend £20bn on the NHS.
Commentators therefore expect this budget, Hammond’s third, to include pledges to improve spending on public services and to focus on tax, though the Chancellor will be conscious that consumer sentiment remains fragile.
However, the budget is calculated on the assumption that the UK will secure a withdrawal agreement with the EU, so many pledges could be scrapped entirely if no deal is forthcoming. Hammond has previously warned that the UK could face a pro-longed period of austerity should it quit the EU without a deal.
Indeed, a no-deal Brexit could cost the UK £30bn in extra public spending over five years, the National Institute of Economic and Social Research said on Friday. In interviews over the weekend, the Chancellor said if there was a no deal-Brexit, "frankly we’d need to have a new budget that set out a different strategy for the future".
As it is, leaked reports to newspapers lead to expectations that the budget will see spending boosts for health and defence, investment in roads and a boost for the high street industry in the form of a business rates rejig.
More money does not always mean more money, however, as the government's pledge to pump £20bn into the NHS in coming years does not account for existing deficits, with the average NHS trust already borrowing millions of pounds each year.
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Naeem Aslam, chief market analyst at Think Markets UK, predicted that Hammond would be minded to splash the cash by bringing forward income tax cuts and increasing spending - but with Brexit negotiations in deadlock he will find it "extremely arduous" to talk about such matters, especially with the economy sluggish growth since the referendum potentially slumping to just 0.3% growth in 2019.
Michael Hewson, chief market analyst at CMC Markets, said: “Any measures announced today are likely to highly contingent on the ongoing Brexit discussions. Nonetheless the public finances are in much better shape than most of the forecast that predicted doom and gloom in the wake of the 2016 Brexit vote, and are back at levels last seen in 2007.”
Hewson added that he expected the Chancellor to look at the rising costs to small business because of the recent changes to business rates, and to announce another freeze in fuel duty and to keep a check on rising fuel prices.
Ian Williams, analyst at Peel Hunt, said: “Better-than-forecast tax receipts offer the Chancellor a little more policy flexibility that the Office for Budget Responsibility expected; increased road spending and tax cut for small retailers have been ‘pre-announced’.”
Under-pressure sterling may receive a short-term boost. Analysts at Monex Europe said: “Last week saw sterling bottom the G10 currency board as broad dollar strength coincided with domestic political uncertainty and stagnant Brexit developments.
“The Chancellor is buoyed by an unexpected £13bn in extra tax receipts coming into today’s announcement. Sterling may find some solace in the expansion of government spending, boosting UK growth that looks set to moderate in the final quarter of the year. But the Bank of England will continue to remain on hold until Brexit uncertainly clears.
Jasper Lawler, head of research at London Capital Group, said: “A pledge to increase spending is expected to offer some support to the pound. Hammond’s tax cut for smaller retailers, hammered by online retailers, could also give the sector a well need lift.
“However, promises of further spending will come with a warning attached. Should no Brexit deal be achieved, the government will need to rewrite its economic strategy and spending plans. Hammond will use this opportunity to urge the Conservative party to unite behind May’s final push for a Brexit deal.”