Hammond hit by new wave of borrowing after Brexit

BUDGET2017 Who’d want to be a trader on a modern Budget Day?

CHANCELLOR Philip Hammond took a Budget Day mauling from his official watchdog today as it slashed growth forecasts and engulfed the public finances with tens of billions more in borrowing.

Hammond’s second Budget of the year — eight months after his first fell apart in embarrassing fashion — was set to contain bleaker news after the Office for Budget Responsibility took a more downbeat view of the UK’s longer-term growth prospects.

Its March forecast of 2% growth in 2017 was cut while City economists were expecting billions extra to be added to the deficit over the course of the five-year forecast, putting Hammond’s efforts to cut the UK’s deficit to 2% of GDP by 2021 under severe strain. “Politically, they’re one more shock away from missing their own fiscal rule,” RBC economist Sam Hill said.

Despite a likely £8 billion undershoot against this year’s £58.3 billion official borrowing target, RBC says £24 billion in extra borrowing over the next five years looms, intensifying after the EU exit. But the “structural” deficit — the gap after adjusting for the ups and downs of economic growth — is set to be much higher after the OBR took an axe to its productivity forecasts following warnings of a “significant” down- BACK in the Ken Clarke days, a hush would come over the City when the Chancellor got up to deliver his Budget.

Traders would watch their TV sets enthralled over whether he’d slash income and corporation tax, pick the pocket of North Sea oil or — crucial to brokers’ fun-bets down at Ladbrokes — take another sip from his whisky glass.

Modern era budgets are very different. Everything is leaked to the media in advance, so that, with the odd exception (George Osborne’s pension freedoms in 2014 spring to mind) there’s little left for the Chancellor to unveil on the day.

The result is that, when the present Chancellor took to his feet today, bar an occasional squint at the BBC highlights, it was largely grade last month. The cumulative structural deficit therefore could be almost £60 billion higher, Hill warned, requiring tax rises or spending cuts and “making the political challenge of reducing the deficit that much harder”.

Drastic reductions to the OBR’s productivity estimates — lowering longterm growth and blowing a hole in tax returns — could even see the structural deficit leap to £70 billion in 2021-22, the Institute for Fiscal Studies warned recently. The final reckoning depends on how much the watchdog judges that lower unemployment and longer working hours offset the setback.

Capital Economics has pencilled in an extra £28 billion in borrowing over the next five years, with the Bank of England’s recent interest rate rise adding around £3.5 billion to the UK’s debt interest bill. Oxford Economics, meanwhile, predicts an extra £25 billion and HSBC an even larger £38 billion black hole over the forecast period.

But there is also likely to be a boon for the Chancellor in the reclassification of housing associations into the private sector, which will take £66 billion in debt and up to £5 billion a year in interest payments off the public books — potentially giving Hammond more leeway for discretionary spending and “putting the public finances in a slightly rosier-looking position”, according to HSBC economist Chris Hare.

@russ_lynch business as usual in the City. In fact, with the US shut for Thanksgiving and Black Friday for the rest of the week, if anything, it’s been quieter than an average Wednesday.

But the bigger Tory politics at play behind this Budget really can cause market ructions.

If the Brexiteer MPs snapping at the Chancellor’s heels successfully argue that today was so dull Hammond has to go, the markets will wake with a jolt.

Especially if the enfeebled Theresa May buckles to appoint a hardline Brexiteer such as Michael Gove to the second-biggest job in the Government.

The pound would plunge as the world took a dim view of our economic prospects of exiting the EU with no deal.

The FTSE 100 — whose members earn their money in foreign currency — would rise, the more UK focused FTSE 250 would slide.

If, on the other hand, Hammond survives to fight another day, the City will return to the political question that really obsesses them: what happens when Jeremy Corbyn’s in Number 10?

A foreign exchange investor describes trading through the Tory party Game of Thrones as a mixture of blind man’s buff and piñata. Strike it right – like those who shorted the pound before the referendum - and you’re showered in sweeties. But the chance of getting a hit is low because you can’t see what will happen next.

For example, if Gove does become Chancellor and keeps rabble-rousing against the EU negotiators, the pound will fall. If he moves into the centre ground to unify the party, the pound rises.

If the May/Hammond/Davis axis remains at the top, sterling stays where it is, but wobbles every time the weak leadership hits a bump.

If Corbyn gets in, his social policies will hurt the economy, but he may kick Brexit into the long grass. The pound might actually rise. Add to that an unpredictable Bank of England and you could be forgiven for pitying the traders. @ArmitageJim