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Brexit blows the UK Budget
The UK Treasury is set to miss its budget target again in 2016/17 and has no intention to return the budget to balance during this parliament. Although fiscal deficit is expected to jump to £59bn (from £39bn in March) in 2017/18, it’s a good sign that the Government is trying to offset the negative impact of Brexit and not leave monetary policy to do all the heavy lifting. Chancellor Hammond will borrow around 2.5% of GDP more than was the objective in March over the next five years. Brexit blows the UK Budget
The Office of Budget Responsibility (OBR) forecasts that economic growth of 2.1% in 2016 to slump to 1.4% 2017, and then rebound to 1.7% in 2018. In turn, the Budget is not expected to be balanced by 2020/21, a £3obn swing into the red since March. Nonetheless, as a result of the EU Referendum, the UK economy needs supporting, and fiscal policy stimulus is required. Importantly, alongside tax reform, productivity is a focus, with £23bn to be spent on infrastructure and innovation over the next five years.
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Economic growth as a result of the EU Referendum, however, is estimated to be 2.4% lower over the forecast period than it would be otherwise. As a result, confidence in the economy is already at a low ebb. Although consumer confidence has rebounded from its post-Brexit slump – the lowest level in nearly three years – uncertainty remains over the structure of the UK-EU relationship and worse economic times are to come.
The damage to the UK’s credit rating has already been done. Weaker growth prospects led the UK to lose its AAA credit rating following the EU Referendum. Although ratings agencies have warned of a further possible downgrade, the result will depend on the negotiations surrounding the access to the European single market. To that end we expect that the ‘hard Brexit’ will not result and that a ‘middle of the road’ solution will be agreed, akin to that of Switzerland. However, we feel that the worst case scenario is priced in to both credit spreads and the British Pound.
Despite a blowout in coming years, the government estimates that net debt will decline by the end of the current parliament. Net debt to GDP is expected to rise to 87.3% of GDP in 2016/17 (from a March forecast was 82.6%), to 90.2% in 2017/18 (81.3%) and decline modestly thereafter to 89.7% in 2018/19 (79.9%).
While Brexit has blown the UK Budget, with concerns over growth and inflation set to rise, the Governments’ new policies are a helpful response to try and offset economic stagflation.
Martin Arnold, Global FX & Commodity Strategist at ETF Securities
Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.
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