The pre-Brexit Budget that went off without a bang

JP Morgan Asset Management

Stephanie Flanders, Chief Market Strategist for the UK and Europe at JP Morgan Asset Management, shares her thoughts on the chancellor’s spending review in a short response bulletin. Stephanie considers the effect of the announced measures on the economy and the implications for investors.

Today the UK Chancellor, Philip Hammond, had to sound like he was making good on the Prime Minister’s promise to “make the UK economy work for everyone”, while also throwing money at short-term emergencies, bragging about the better-than-expected data and “battening down the hatches” for Brexit.

He more or less ticked every box, and even made a few jokes at the Labour Party’s expense along the way–all without fundamentally changing the tough course for the public finances that has been a common feature of many recent UK Budgets. That lack of activism may seem complacent to people worried about the Brexit storms to come. But the Chancellor probably thinks it’s just common sense.

Key points to note

  • A significant downward revision of GBP 16.4 billion in borrowing for 2016–17 compared with the November forecasts. Subsequent borrowing forecasts are lower for every year through to 2010–2021, but only very marginally. The forecast for net borrowing in 2020–2021–at GBP 16.8 billion, or 0.9% of GDP–is little changed from the November forecast.
  • Stronger growth forecasts in the short term, with an increase in the 2017 forecast from growth of 1.4% to growth of 2%. But the forecasts after 2018 have been revised down slightly, meaning the economy is expected to end up in a similar place in 2020 to where it was before.
  • Emergency money for local councils to respond to short-term challenges over funding social care and handling the transition to higher local business taxes in many parts of the country, and targeted money for skills and training policies, but no major giveaways and a significant increase in tax for self-employed people.
  • No significant change to official estimates of UK potential growth or growth in productivity over the next few years, which will be the single most important determinant of UK growth in the long term.

Key takeaways for investors

The Chancellor wasn’t trying to grab a lot of headlines in this Budget, which had been heavily trailed as a low-key affair. There were also strikingly few mentions of Brexit. The message was that the government is not obsessed with the details of leaving the EU, but rather is taking the departure from the EU as an added reason to invest in skills and tackle long-standing problems with the economy.

The changes to self-employment taxation could make long-term sense, but are politically risky in the short-term. There are likely to be some unexpected consequences for particular firms and sectors, as well as complaints from business groups. But overall, this is not a Budget that is going to change the terms of doing business for companies or fundamentally change global investors’ outlook on the UK. What matters most to the short-term path for the UK economy and markets will be the state of the global recovery, the start of the Brexit negotiations in the weeks ahead, the response of UK consumers to higher inflation and the pace and consequences of any further fall in the pound. The Chancellor could not make a big difference to any of those key variables today, and–very sensibly –he refrained from suggesting he could.


The above article by Stephanie Flanders was first published by J.P.Morgan Asset Management on 8th March 2017.