Against a backdrop of continued uncertainty over what shape and form Brexit will take, Chancellor Phillip Hammond used his Spring Statement to reassure both consumers and business that the UK economy is in rude health – provided a no-deal Brexit is avoided.
Hammond described the economy as “remarkably robust” and added that it has “defied expectations”, pointing to improvements in government finances, wage growth and “on target” inflation levels.
This was backed up by the Office for Budget Responsibility (OBR), which forecast GDP growth rates of 1.2% this year, 1.4% in 2020 and 1.6% in 2021, 2022 and 2023. The growth figure for 2019, though, is notably lower than the forecast of 1.6% made by the OBR last October.
Throughout his speech Hammond repeatedly stressed a no-deal Brexit would deal a negative blow to the UK economy.
“Leaving (the European Union) without a deal leads to a smaller, less prosperous economy in the long term,” he said. He said the decision by MPs last night (12 March) to reject prime minister Theresa May’s Brexit deal for a second time had “left a cloud of uncertainty over the UK economy”.
He added that a deal would result in continued improvments in public finances, including a further reduction in government borrowing levels – providing the transition is orderly.
Hammond also warned of a sharp and sudden spike in inflation under a no-deal, due to the economy operating close to full capacity and the impact of higher prices for imports.
Providing a Brexit deal is reached, Hammond announced, the government will hold a full spending review in the summer. This will set departmental budgets, including three-year budgets for resource spending, and will shape the priorities of the Autumn Budget.
As expected, as the Spring Statement is not intended to be a major fiscal event but primarily an update on the government’s finances, no metaphorical rabbits were pulled from the Chancellor’s hat from a personal finance perspective, with no tax giveaways or tweaks to pensions. The Budget will take place in the autumn, but if there is a no-deal Brexit the likelihood is that an emergency budget will be called ahead of this date.
In terms of new spending commitments the government pledged a further £3 billion to build more homes and handed £100 million extra to the police, with a view to reducing knife crime.
According to Philip Smeaton, chief investment officer of Sanlam UK, the statement had a very clear motive, which was to dangle the prospect of a ‘deal dividend’ in front of those MPs who might still change their minds and vote for Theresa May’s withdrawal agreement if it comes back for a third time.
He adds: “Despite the long shadow cast by the Brexit drama, Hammond came to the House of Commons with positive news on tax receipts, meaning that the government is on course to have a smaller deficit in this financial year. While in theory this should give the Chancellor greater wriggle room, he was at pains to point out that the purse strings won’t be loosened until there is greater clarity around the UK’s future relationship with the EU.”
Richard Carter, head of fixed interest research at Quilter Cheviot, agrees, but points out the Spring Statement was always going to be overshadowed by the Brexit crisis playing out on the floor of the House of Commons.
“The near-term outlook for the UK economy hinges largely on the outcome of those votes and whether MPs can agree an orderly exit from the EU in the coming days. However, the Statement was a reminder that it is not all bad news when it comes to the UK economy,” he says.