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UK predicts worse growth and earmarks cash for hard Brexit

[LONDON] Prime Minister Theresa May's under-fire government acknowledged the UK economic outlook is deteriorating as it set aside an extra £3 billion (S$5.38 billion) to prepare for all possible Brexit outcomes.

Opening his Budget speech in Parliament on Wednesday, Chancellor of the Exchequer Philip Hammond said the Office for Budget Responsibility now sees 2018 economic growth of 1.4 per cent compared with the 1.6 per cent predicted in March as a result of revised productivity data and headwinds caused by Britain's vote to quit the European Union. Growth is predicted to be lower than forecast in every year through 2021.

The UK economy faces "a future that will be full of change, full of new challenges and above all full of new opportunities," Mr Hammond told lawmakers in the House of Commons in London. "In this Budget, we express our resolve to look forwards, not backwards." Mrs May's government has been rocked by resignations, rebellions and sluggish progress in Brexit negotiations, and Mr Hammond sought to strike an optimistic tone while limiting spending to fit the new economic reality. His ability to offer giveaways to win back support lost in June's catastrophic election is limited.

The announcement of Brexit funding shows he's relented to demands from more pro-Brexit factions of the cabinet to set aside money so the UK can walk away from divorce talks with the European Union. It's also noteworthy that back in March 2016 - prior to the referendum - the OBR predicted much healthier growth of 2.2 per cent in 2017 and 2.1 per cent in 2018.

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"While we work to achieve this deep and special partnership, we are determined to ensure that the country is prepared for every possible outcome," Mr Hammond said.

"We have already invested almost £700 million in Brexit preparations and today I am setting aside over the next two years another £3 billion and I stand ready to allocate further sums if and when needed." The timing of the Budget coincides with a particularly delicate time in Brexit negotiations - meaning there is even less space for mishaps. May is getting ready to make a better offer on what the UK will pay in order to leave the bloc with both sides engaged in high-stakes diplomacy to try to get a breakthrough at a crunch December summit in Brussels.

The fate of May's government is tied both to a Budget that isn't a dud and to making progress in Brexit talks so the focus can shift to trade and securing a smooth transition out of the bloc for businesses concerned about a chaotic departure.

The budget deficit will be £39.5 billion for 2018-19, Mr Hammond said, compared with the £40.8 billion forecast in March, and borrowing will be less than previously forecast over the next five years.

In the debate that follows Mr Hammond's statement, he will be listening for support from his own lawmakers. He can assume the opposition will attack, but with such a slim majority he can't afford to lose the support of his own side.

There is the possibility that some Tories, itching for a fight, will pounce on any error as a sign of his unsuitability for the job. He's particularly vulnerable to criticism from euroskeptic Tories who see him as too gloomy about Brexit and partisan in his views.

The chancellor, who voted to remain in the EU in last year's referendum, has angered pro-Brexit lawmakers by advocating a gradualist approach to leaving the EU and warning of the danger to the economy of a hard break from the bloc. Others have criticized his caution over spending as Labour's anti-austerity agenda has won support from voters.

BLOOMBERG

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