With Britain poised to kick off the process of leaving the EU, Hammond said the UK economy had so far “continued to confound the commentators” by withstanding the referendum shock, setting it up well for the Brexit talks ahead, report William Schomberg and David Milliken.
The British economy is now on course to expand 2% in 2017, up sharply from a forecast of 1.4% made in the latest round of official forecasts in November, according to the Office for Budget Responsibility.
However, growth from next year to the end of the decade is set to be weaker than thought as the office cut its forecasts for 2018, 2019 and 2020 from November’s outlook. Hammond said he would not be distracted from his plan to bring down what remains one of the biggest budget deficits among the world’s rich nations, something he is aiming to eliminate at some point in the first half of the next decade.
“The only responsible course of action ... is to continue with our plan, undeterred by any short-term fluctuations. We will not saddle our children with ever-increasing debts,” he said in his Budget address.
Hammond has eschewed budget gimmicks and instead wants to build a reserve fund in case he needs to help Britain’s economy through a Brexit slowdown ahead.
He announced a £2bn (€2.30bn) increase in funding for social care over the next three years, trying to address one of the most high-profile strains on Britain’s public services at a time of persistent spending cuts.
The Brexit vote in June, which will separate the UK from the EU which buys about half of its exports, had been expected to deliver an immediate and heavy below to the economy.
Instead, consumers continued to spend heavily and helped GDP to increase 1.8%, faster than all other Group of Seven economies in 2016 bar Germany.
Signs are now emerging that shoppers have turned more cautious as inflation rises, pushed up by the tumble in the value of the pound following the referendum. Stronger-than-expected economic growth since June means Britain’s budget deficit is likely to fall much faster than previously thought in the current financial year to just under £52bn, or 2.6% of GDP.
The office now expects the UK government will need to borrow £23.5bn less from 2016/17 to the 2020/21 financial year than it projected in November. However, most of that was due to the sharp improvement in the year to the end of March this year, underscoring the challenge further ahead.
AIG opts to bypass Ireland for new base
Insurance giant AIG has chosen Luxembourg over Ireland for its new European offices following Britain’s decision to quit the EU.
The decision comes as UK Chancellor Philip Hammond’s budget revealed the UK plans to raise an additional £1.9bn (€2.2bn) of tax on bank profits over the next five years, even as some global lenders prepare to relocate operations following Brexit.
The UK increased its estimate for receipts from an 8% corporation tax surcharge on bank profits to £9bn in the period through March 2022, according to the UK budget documents. Global lenders have said thousands of jobs may leave London, depending on the deal prime minister Theresa May seals with the EU.
AIG wrote to the Government yesterday to say its Irish operations will continue to focus on the Irish market. Sterling yesterday stayed lower against the dollar and eased to 86.75 pence against the euro after the UK budget.
“The Chancellor has lived up to his reputation for fiscal conservatism” but the UK’s Office for Budget Responsibility has made “no provision for any severance payment that the UK might need to make upon leaving the EU, said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
"As a result, the Chancellor’s “fiscal headroom” likely will turn out much smaller than he envisages.”