March 8, 2017 / 4:56 PM / 5 months ago

Do-nothing UK budget belies big risks ahead

Britain's Chancellor of the Exchequer Philip Hammond leaves his official residence in Downing Street in London, Britain, March 7, 2017.Toby Melville

LONDON (Reuters Breakingviews) - “First, do no harm.” Philip Hammond appears to have adopted the medic’s motto. The British finance minister used his spring budget to make a few cosmetic tweaks to taxes and spending. His surgical approach makes sense, but the as-yet uncertain costs of the country’s departure from the European Union could yet lead to a more graphic dismembering of his objectives.

More excitable politicians sometimes describe Brexit as an opportunity to fundamentally reshape the British state. There was no hint of radical thinking in the final March budget before the set-piece event is moved to the autumn. In between cracking jokes about his “Spreadsheet Phil” nickname, Hammond found a bit more money for pubs, schools and social care, while slightly hiking taxes for self-employed workers and company directors. The net handout amounts to 5 billion pounds over the next five years, according to the Office for Budget Responsibility – a rounding error for a government with an annual budget approaching 800 billion pounds.

The damage yet to be wrought by Brexit ties Hammond’s hands. The UK economy has been surprisingly resilient since last June’s referendum: the OBR now expects growth to hit 2 percent this year - back in November it expected 1.4 percent. But the independent agency still thinks expansion will slow as Britain negotiates the terms of its EU departure. As a result, the projected UK budget deficit for the fiscal year ending in April 2021 is 0.9 percent of GDP, slightly higher than expected last November, though still comfortably within Hammond’s self-imposed 2 percent target.

These forecasts have been wrong in the past and will almost certainly prove wide of the mark again. Yet they could also prove to be overly optimistic: most private sector forecasters expect a sharper slowdown. The OBR is making no allowance for Britain paying a “divorce bill” as part of leaving the EU, or that it fails to negotiate a smooth departure. In that scenario, confidence, growth and the public finances would almost certainly take a hit – and Hammond would have to put down his scalpel and pick up a set of defibrillators.

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