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Autumn Statement: The challenge facing Philip Hammond

Published 18/11/2016

Chancellor Philip Hammond has challenges if he is to please boss Theresa May and the markets.
Chancellor Philip Hammond has challenges if he is to please boss Theresa May and the markets.

Philip Hammond's inaugural Autumn Statement next week will be punctuated by ballooning government borrowing and slowing economic growth as Britain hurtles ever-closer towards the European exit door.

In his first major set piece, the Chancellor will be tasked with squaring Prime Minister Theresa May's push to help cash-strapped households with tackling a troubled economic outlook fuelled by Brexit uncertainty.

Mr Hammond has already abandoned the economic direction plotted by his predecessor George Osborne , whose aim of achieving a budget surplus by 2020 was scrapped by Mrs May.

Free from these austerity measures, the Chancellor will have greater flexibility to tackle the challenges that lie ahead - despite the Prime Minister pledging that the Government will be fiscally responsible.

The constraints posed by the dismal state of the public finances will be chief among Mr Hammond's concerns, as he looks to shield the UK economy against slowing growth with reduced spending power.

The latest figures showed the Government borrowed a higher-than-expected £10.6 billion in September.

For the financial year to date - April to September - borrowing excluding banks fell by £2.3 billion to £45.5 billion compared with the same six months in 2015.

A closer look at the state of the UK's public finances will come on Tuesday, with some economists expecting borrowing excluding banks to hit around £6 billion in October.

While this would be narrowed from £6.4 billion a year earlier, it will mean the Chancellor can only borrow £4 billion for the rest of the financial year if he is to meet the latest Office for Budget Responsibility's (OBR) forecast of £55.5 billion for 2016/17.

Professional services firm PwC warned last Tuesday that government borrowing was more likely to hit £67 billion for this financial year and overshoot forecasts by £100 billion by 2021.

Despite having less cash to play with, next week's statement is likely to herald more money for infrastructure as Mr Hammond takes advantage of the cheap cost of borrowing.

Howard Archer, chief UK and European economist at IHS Markit, said the Chancellor has hinted that he will prioritise infrastructure and housing measures to help support the economy.

"The Chancellor has already indicated that an additional £2 billion will be earmarked to tackle the housing shortage on top of a £3 billion house building fund that has already been targeted at small and medium-sized developers, offering cheap loans or financial guarantees. There are also plans to cut red tape."

Mr Hammond will have taken some comfort from the resilience of the UK economy in the wake of the Brexit vote, with third quarter gross domestic product (GDP) defying expectations of a sharp slowdown to grow 0.5% from 0.7% in the second quarter.

Earlier this month, the Bank of England revised up its forecast for GDP over the next two years from 2.0% to 2.2% for 2016 and from 0.8% to 1.4% in 2017, but slashed it for 2018 to 1.5% from 1.8%.

With tax receipts set to suffer a blow as Brexit uncertainty applies the brakes to economic growth, the Chancellor may struggle to introduce fresh tax cuts in the Autumn Statement.

While he agreed to honour planned cuts to corporation tax from 20% to 17% by 2020, Mr Osborne's hopes of a further reduction to below 15% now look a distant hope.

However, Mr Hammond will still come under pressure from Mrs May to find room to help squeezed households facing rising costs from soaring inflation triggered by the Brexit-hit pound.

While inflation eased back to 0.9% in October, from 1% in September, Bank of England Governor Mark Carney said Britons should not to be fooled as a sharp rise in the cost of living is coming.

The Bank, which kept interest rates on hold at 0.25% in November having cut them from 0.5% in August, predicts inflation will nearly treble over the next two years, shooting up to 2.7% for 2017 and 2018.

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