UK forced to borrow more as Brexit hits growth
UK Chancellor of the Exchequer Philip Hammond has laid out a sombre framework for post-Brexit Britain - slashing the forecast for economic growth in 2017 and saying the government will need to borrow more over the next five years, partly as a result of the vote to leave the European Union.
Outlining his Autumn Statement to Parliament yesterday, five months to the day after Britain opted to quit the EU, Hammond said the Office for Budget Responsibility (OBR) now sees economic growth next year of 1.4pc instead of the 2.2pc forecast in March.
The cumulative budget deficit will also widen, with just under half the extra £122bn foreseen through 2021 - £58.7bn - a direct result of the referendum result, the Treasury said in documents published to accompany Hammond's statement.
The vote to leave the EU "will change the course of Britain's history," Hammond told the House of Commons. "But it's a decision that also makes more urgent than ever the need to tackle our economy's long-term weaknesses," including a productivity gap, a housing shortage and a "damaging imbalance in economic growth and prosperity".
"Our task now is to prepare our economy to be resilient as we exit the EU and match-fit for the transition that will follow," he said.
In his first budget statement since he was appointed by UK prime minister Theresa May in the wake of June's Brexit vote, Hammond cited heightened economic uncertainty and a weaker pound for the clouded outlook. The OBR said the economy has less potential for sustainable growth as a result of the decision to quit the bloc.
While seeking to help low and middle-income families and chart a course for fiscal discipline, the deteriorating outlook left him little room for major fiscal giveaways, and the market reaction was muted.
The pound climbed briefly as Hammond was on his feet before resuming its decline, and was down 0.3pc at $1.2382 by 3pm in London. UK government bonds slid, pushing the 10-year yield 10 basis points higher to 1.47pc.
The UK economy has proved unexpectedly resilient to the referendum result, and the OBR revised its 2016 growth forecast to 2.1pc from 2pc. But cracks are already appearing. UK employment growth is slowing and household incomes are starting to come under pressure as the falling pound spurs inflation. The government is no longer trying to deliver a budget surplus by 2020, Hammond said, but he pledged to "balance the books" early in the next parliamentary term from 2020 to 2025.
"A credible fiscal policy remains essential for maintaining market confidence and restoring the economy to long-term health," Hammond said. "The prime minister and I remain firmly committed to seeing the public finances return to balance as soon as practicable while leaving enough flexibility to support the economy in the near term."
The chancellor outlined a new Charter for Budget Responsibility, committing the government to return the public finances to balance as soon as possible, to cyclically adjusted borrowing at less than 2pc in 2020-21 and to a cap on welfare spending set by the government and monitored by the OBR.
Hammond's statement "highlights the damage that Brexit will likely cause," James Knightley, an economist at ING Bank NV in London, said. "We are more pessimistic on GDP growth than the government" and expect borrowing to be higher. Therefore we see a real risk that these new rules, much like Gordon Brown's Golden Rule and George Osborne's fiscal rules, will be missed."
Hammond said he'll keep to a plan to cut corporation tax to 17pc by 2020. Loopholes allowing multinational corporations to avoid tax will be closed, he said. (Bloomberg)