REPORT
By Gökhan Kurtaran
London letter, week beginning Nov. 28

-End of austerity and loosening of belts to boost U.K. economy

 

Last week, U.K. Chancellor Philip Hammond set out a budget to boost the economy during the heightened uncertainty before the U.K. divorce negotiations with 27 EU member states. According to the Autumn Statement, U.K. economic growth is expected to slow down to 1.4 percent in 2017 and to accelerate to 1.7 percent in 2018. Despite the slow down compared with other advanced economies, the U.K. economy performed reasonably well with economic growth of 2.3 percent in quarter 3 of 2016. However, the U.K. has a variety of unknowns ahead, possibly a “messy divorce” if not a “hard Brexit”, that will need strong fiscal discipline and monetary policy flexibility. For example Britain might face a divorce bill from the EU for as much as €20 billion, according to a Financial Times analysis that shows the bloc’s shared budget is emerging as one of the biggest political obstacles to a Brexit deal.

There is one more problem ahead, and that is the widening budget deficit and the ever mounting record high public debt. According to the autumn statement, former Chancellor George Osborne’s budget surplus target predicted for 2020 has been left to the next parliament after the general elections. In the 2016 budget, public sector net borrowing is higher than forecast than any other year and is predicted to be £32 billion in 2020-21, reflecting primarily the impact of lower growth on tax revenues. The U.K.’s public sector debt as a percentage of GDP is expected to reach 84.2 percent by the end of this year and is forecast to reach 87.3 percent in 2016-2017 and 90.2 percent in 2018.

“The fiscal roll announced by the chancellery today will be around £2 trillion by the end of parliament. Circumstances changed, you have to change, you have to balance and be able to invest in productivity,” said Simon Kirby, economic secretary to the Treasury, responding to Anadolu Agency during a budget briefing last week.

 

-Is it “the end of austerity” in the U.K.?

According to Kirby the answer is not yet. “I am not sure it is the end of austerity. I prefer that we use the expression of living within our means. It’s a profiling out of debt and a deficit position, which is sensible and balanced. We recognize the profiling of the fiscal roll and aim to reduce the deficit in a longer time frame.”

Still, according to the Office for Budget Responsibility, the national debt is expected to increase by £220 billion over a five-year period, taking the total to £1.945 trillion by 2021.

It is a budget for supporting infrastructure investments, the housing sector and innovative businesses, which might boost tax returns in the long run.  According to the Autumn Statement, nearly £7.2 billion is to be spent to support new homes, including Housing Association expenditure, £4.2 billion to spend on science and innovation, £2.6 billion to tackle congestion and to ensure the U.K.’s transport network is fit for the future. The government will also encourage private investments with £400 million from the British Business Bank to unlock £1 billion of new investment in innovative firms planning to scale up, and a doubling of capacity to support exporters through U.K. export finance.

Despite mounting uncertainties, Hammond appears to be fueling the economy to ensure a safe landing through the Brexit turbulence.

28 Nov,2016

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