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Chancellor Hammond likely will broadly stick to the current plans for the fiscal consolidation to intensify next year when he delivers his second Budget on Thursday.
If the Chancellor is true to his word, Wednesday's Budget will be a pedestrian affair with few major policy changes designed to prevent the economy from slowing this year. In an article in The Sunday Times, Philip Hammond asserted that "we cannot take our foot off the pedal" in the mission to eliminate the budget deficit by the end of the next parliament.
The Chancellor's Autumn Statement dashed hopes that the fiscal consolidation will be paused while the economy struggles to adjust to the implications of Brexit. Admittedly, Mr. Hammond has another opportunity in the Spring Budget to reduce next year's fiscal tightening.
The Chancellor hinted in the Autumn Statement that the fiscal consolidation might not be as severe as it appears on paper because he has built in some "fiscal headroom". By that, Mr. Hammond means that he could borrow more and still adhere to his new, self-imposed rules.
The Chancellor was bolder than widely expected yesterday and scaled back the fiscal consolidation planned for the next two years significantly, even though his borrowing forecast was boosted by the OBR's gloomier prognosis for the economy.
Both the Prime Minister and Chancellor last week threatened to cut business taxes aggressively to persuade multinationals to remain in Britain in the event of hard Brexit. But these threats lack credibility, given the likely lingering weakness of the public finances by the time of the U.K.'s departure from the EU and the scale of demographic pressures set to weigh on public spending over the next decade.
April's public finances indicate that the economy has remained weak in Q2, casting doubt on the suggestion from recent business surveys that the slowdown in Q1 was just a blip.
December's public finance figures suggest that borrowing is on track to come in a bit below the forecasts set out in the Autumn Statement in November. But we caution against expecting the Chancellor to unveil a material reduction in the scale of the fiscal consolidation set to hit the economy in his Budget on 8th March.
November's Markit/CIPS construction report brings hope that the sector no longer is contracting. The PMI increased to a five-month high of 53.1 in November from 50.8 in October, exceeding the 52-mark that in practice has separated expansion from contraction.
Public borrowing continues to falling at a very slow pace, despite the major fiscal consolidation implemented this year. Public sector net borrowing excluding public sector banks--PSNB ex.--was £10.5B in August, only 8.1% less than the £11.5B borrowed a year ago.
The U.S. household sector carries substantial gross debts, even after the sustained deleveraging since the crash of 2008. The gross debt-to-income ratio stood at 105.3% in the second quarter of this year, down from the 135% peak in late 2007 but still well above the 88% average recorded in the 1990s, which was not a decade of restraint on the part of consumers.
Progress in reducing the budget deficit has ground to a virtual halt, despite the ongoing fiscal consolidation. Public sector net borrowing excluding public sector banks--PSNB ex.--was £10.6B in September, exceeding the £9.3B borrowed in the same month last year.
The EU has had a better start to the Brexit negotiations than its counterpart across the Channel. The risk of disagreement within the EU on the details with of the U.K.'s exit is high, but the Continent has presented a united front so far, mainly because Mr. Macron and Mrs. Merkel agree on the broad objectives. They have no interest in punishing the U.K., but they are also keen to show that exiting the EU has costs for a country which leaves.
With plenty of evidence emerging that consumer spending and business investment are set to suffer from a collapse in confidence, attention is turning to whether other sectors of the economy are ready to step up and support growth. But the fruits from reduced fiscal contraction and stronger net trade will be small and will take a long time to emerge.
The Chancellor kept his word and made only trivial policy changes in the Spring Statement, but he hinted at higher spending plans in the Autumn Budget.
Evidence that U.K. asset prices still are depressed by Brexit risk has become harder to find.
The possibility of a Corbyn-led Labour Government has been highlighted by some analysts as a major economic risk. Mr. Corbyn, however, has little practical chance of being elected soon.
January's public finance data, released today, take on particular importance because they are the last to be published before the Chancellor delivers his first Budget on March 8. The public finances nearly always swing into surplus in January, primarily because the deadline for individuals to submit self-assessment--SA--tax returns for the previous fiscal year is at the end of the month. Firms also pay their third of four payments of corporation tax for their profits in the current fiscal year.
Public sector borrowing still is on course to greatly undershoot the March Budget forecasts this year, despite October's poor figures.
Reforms to Stamp Duty Land Tax paid by first-time buyers likely will take centre stage in the Budget. At the Conservatives' party conference, Theresa May pledged another £10B to expand the Help to Buy Scheme, which helps first-time buyers obtain a mortgage which just a 5% deposit.
In recent public appearances, the Chancellor has made a concerted effort to downplay expectations of fiscal loosening in Wednesday's Autumn statement. On Sunday, he labelled the deficit "eye-wateringly" large and he warned that he was "highly constrained".
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