UK Finances in the spotlight again as the Office of Budget Responsibility is set to deliver an unwelcome surprise to the UK Chancellor and markets.
Sterling has been under pressure in recent days, suffering its worst week in a year, from the lack of progress in Brexit negotiations and politics surrounding PM Mrs May with various rumours that she might be forced to resign. No one really wants the job if she does resign and that adds more uncertainties in itself.
Late last night an article appeared in the Financial Times (FT) to remind us there is an economy to consider aside from political woes and weigh on Sterling further. We are seeing that in today`s price action. The Office of Budget Responsibility (OBR) have dropped a bombshell on Chancellor Hammond`s forthcoming budget plans which are crucial to stimulating the UK economy in the face of an apparent slowdown. The OBR are reportedly likely to downgrade their growth forecasts and present the Chancellor with a significant shortfall in his budget and funds available to him. His budget is currently £26 billion but the OBR is signalling that only one-third of that £26billion will be available to him according to their latest assumptions. The FT call it a “bloodbath” Sounds more like another mountain to climb for the Government and at a time they can ill afford such news.
The FT go on to say that
“the headroom in the public finances that the Chancellor created last year as a buffer for the economy through the Brexit period is likely to be wiped out after the government`s fiscal watchdog concludes its forecasts for growth have been too optimistic”.
Under increasing pressure to reduce austerity measures, Mr Hammond`s plans to end the cap on public sector pay, lower student debt and create more affordable housing could be in doubt. Can he borrow to make up the difference? He may have to or scale down on intentions. Either way he’s in a bind as the opposition will jump on him from both directions for over-promissing and under delivering, or having to increase borrowing. The latest budget deficit numbers recorded the lowest deficit since before the financial crisis. News that was very investor-friendly and perhaps especially good news for inward investment which is reportedly still quite buoyant.
“Productivity has fallen short of OBR forecast”, FT reports, deepening this year, implying that the economy can only grow if the employment picture improves further and beyond already, “current record levels”
or significantly that;
“higher immigration boosts the number of employees”.
(Brexiteers and the fundamental reason for exiting the EU and freedom of movement take note?)
Some balance there however as the FT reports that the UK Treasury are “resigned to the OBR downgrading the growth outlook for the UK economy as it is currently significantly more optimistic than the Bank of England, the OECD and most private sector forecasters”.
It still implies trouble ahead for investors to jump on as the Chancellor announces his intentions to deal with the implications of such a shortfall.
In conclusion, the FT reports that The OBR and Hammond will try to play down the cut in forecasts, and say that they are not reflective of a changing Brexit assessment. Investors will only believe that when they see it.
EIther way, there’s no digging out of this hole by Hammond and the market is going to take a very dim view. In the meantime, this bitter disappointment will likely weigh on Sterling further and Brexit talks continue next week and we should perhaps be on guard for action from the ratings agencies too, once the full picture is known.
On Monday, we will be releasing our latest thoughts on Brexit negotiations, our assessments of the implications, possible opportunities and update readers with the news as it breaks to help readers react with their positions. You can follow the Brexit Review here.