March 9, 2018 / 2:22 PM / 9 months ago

Hammond plans low-key budget update as Brexit nears

LONDON (Reuters) - Finance minister Philip Hammond looks set to announce Britain’s smallest budget deficit since 2002 next week but he is still likely to resist calls to loosen his grip on public spending for now.

FILE PHOTO - Britain's Finance Minister Philip Hammond arrives at HSBC to deliver a speech on Brexit, with CEO John Flint and Chairman Mark Tucker, at their headquarters in Canary Wharf in London, Britain, March 7, 2018. REUTERS/Stefan Rousseau/Pool

Hammond wants to keep funds in reserve to help the economy through its split with the European Union, disappointing some law-makers in his Conservative Party who are urging him to spend money to counter the rise of the opposition Labour Party.

Despite the economy holding up better than most forecasts, which has helped the public finances, Britain went from the fastest-growing country in the Group of Seven rich nations to its slowest last year.

With little more than a year until Britain breaks from its main trading partners, London and Brussels remain far apart on what their future trade relationship will look like.

Officials say Hammond plans no big policy announcements in his Spring Statement on the budget on Tuesday, which instead will be largely a low-key update of official economic forecasts.

In keeping with his intended image as a no-frills guardian of the economy, Hammond will not pose for the traditional photographs where the chancellor holds aloft his red budget briefcase outside his Downing Street residence.

His speech to parliament - which would normally last an hour - is expected to run for just 20 minutes.

Britain’s finance minister is required to deliver budget statements in the spring and the autumn each year. Hammond has said only the November event will be important in future, eschewing the chance to dominate the headlines twice a year like his more flamboyant predecessor George Osborne.

Nonetheless, with Britain’s health system and other public services under strain, Hammond might hint at a future relaxation of Britain’s eight-year spending restraint when he addresses parliament on Tuesday.

Borrowing in the 2017/18 financial year, which ends this month, is likely to have undershot a previous projection of 50 billion pounds by around 10 billion pounds.

That would cut the budget deficit to about 2 percent of annual economic output, way down from 10 percent in 2010 when the newly elected Conservative government began what the International Monetary Fund has called the biggest budget squeeze of any major rich economy since the financial crisis.

The Treasury is expected to pocket any improvement in the borrowing figures rather than spend it now.

HIGH DEBT

As recently as his last budget speech in November, Hammond was facing a much gloomier picture and there were calls for Prime Minister Theresa May to fire him.

Then, the independent fiscal forecasting agency, the Office for Budget Responsibility, cut its growth forecasts sharply and turned pessimistic on the outlook for productivity, long the Achilles’ heel of Britain’s economy.

However, a rebound in the world economy in late 2017 gave Britain a bit of a boost and even productivity has improved, raising the prospect of brighter OBR figures on Tuesday.

“You could definitely make a case for the chancellor to enter into some near-term fiscal easing,” Matthew Whittaker, an economist with the Resolution Foundation think-tank, said.

Britain has seen an unprecedentedly long stagnation in growth in government spending per person, he said.

“But I think he will be constrained the debt-to-GDP ratio,” Whittaker said.

Public debt stands at 80 percent of annual economic output, more than double its level before the global financial crisis. Although debt has been falling on this measure since 2015, Hammond has said it remains too high for Britain to be able to cope with a future economic crisis.

Looking further ahead, with the economy likely grow only slowly in the coming years, Hammond might float ideas on Tuesday for how the state can fund the health and social care needs of an ageing population, as well as other public services.

This week, the Resolution Foundation said the baby-boomer generation should prepare for higher wealth taxes.

“Most eyes will be on what the OBR says about the deficit this year and whether it maps out a slightly brighter growth outlook,” Philip Shaw, an economist at Investec, said.

“But arguably the direction the chancellor takes on addressing longer-term issues may be much more significant.”

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