ANALYSIS: Hammond’s Budget headache

Posted On: 
31st October 2017

The latest UK growth figures released last week offered the Chancellor a momentary reprieve from the mounting pressure around the forthcoming Budget. 

Philip Hammond will deliver his Autumn Budget on 22 November

A 0.4% quarterly rise in GDP signalled that the UK has still not plummeted into the economic abyss that was predicted ahead of the EU referendum.

But other key indicators of economic health laid out in the Office for National Statistics’ annual publication – The Blue Book – suggest all is not as well as it could be.

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The falling pound hasn’t helped exports much  

The fall in the pound has pushed up prices making imports more expensive, but it should also have boosted exports, and it hasn’t really. As the ONS notes: ‘Exports grew by only 1.1%, which was more than offset by the 4.3% increase in imports, as net trade detracted from GDP growth in 2016.’

Britain’s trade deficit has been an area of historic concern and something former chancellor George Osborne grappled unsuccessfully with during his time in office. The ONS says that 'despite the sterling depreciation associated with the financial crisis, net trade provided little contribution to UK GDP growth in the following years.' And while Osborne set the ambitious target to double annual exports to £1trillion by 2020, he never looked close to hitting it and his successor is fairing no better.   

Vital investment has stalled

Business and government investment in things like machinery, transport and housing has stalled. This is not helpful as it is the basis for future growth and indicates that firms are not feeling confident. It also hampers any attempt to get to grips with the UK’s longstanding productivity problem.   

If there is one thing that kills economic confidence and the resulting investment it is uncertainty, and Brexit has created bucket loads of the stuff. Philip Hammond saw this coming and created some financial headroom for himself, but that has since been eroded as various growth forecasts have been downgraded. He could partly plug the shortfall by leading the way and ploughing cash into national assets, such as housing (as Communities Secretary Sajid Javid has suggested). But alongside that he needs to reassure business that he can steer the UK through choppy Brexit waters.  

Interest rate rise looms

For all the stories written over the years about a potential interest rate rise, it may finally be on the cards. With inflation at 3% it seems that it’s only a matter of time before Mark Carney announces a hike above the historic 0.25% low. This could be a problem for homeowners, businesses and consumers, many of whom are addicted to cheap money after a decade of rock bottom rates. The resulting hit on consumer spending is something Hammond will certainly worry about.

The ONS also notes that while household income has taken a hit, expenditure has risen. So, as the Bank of England has warned, it is largely personal debt fuelling the spending that is propping up growth. But with an interest rate rise on the horizon this is probably unsustainable, and the Chancellor will need to plug the growth gap somehow.

The financial crisis hangover could give Hammond a headache  

The Blue Book confirms what we already knew, which is that the 2007 financial crisis was deeper and longer than its recent predecessors, and we are still limping our way out of it. Austerity was embraced in the aftermath, but without its head cheerleader, George Osborne, it has lost its political appeal. 

As the Institute for Fiscal Studies warned this week, Hammond is under pressure to give patient public sector workers a pay rise, and to fix the UK’s neglected housing market, as well as many other costly demands. Combine this with a potential rise in interest rates, a resulting hit to consumer spending and dwindling business confidence and it seems like now is the time for Phil to flash the cash and prevent a downturn. Asked to describe himself in one word recently though, Hammond said: ‘fiscal’. So I wouldn’t hold your breath.