By Peter Thal Larsen
LONDON (Reuters Breakingviews) - Philip Hammond is struggling with his Brexit straitjacket. Britain’s chancellor announced giveaways to homebuyers and the health service in his autumn budget. But bleak growth forecasts and the economic drag caused by leaving the European Union severely limit his generosity.
Hammond went into the parliamentary showpiece facing a near-impossible task: boost the popularity of a divided and weak Conservative government without breaking fiscal rules he set out just 12 months earlier. These pledge to keep the budget deficit below 2 percent of GDP by March 2021 and shrink government borrowing as a proportion of output by the same year. Downgraded forecasts from the UK’s Office for Budget Responsibility further limited his room for manoeuvre. The independent agency has concluded that the weak productivity growth of recent years will persist. This means increasing output depends on putting more people to work, or on people working longer.
Factor in the drag on trade and reduced immigration from leaving the EU, and the outlook dims further. The OBR now expects Britain’s GDP to grow by 1.5 percent a year or less until at least 2021. Output per head will expand by less than 1 percent in each of those years. The contrast with the brighter economic news in the rest of the developed world adds to the malaise.
This explains why Hammond had to resort to asset sales and accounting fiddles to limit the blow to Britain’s public finances. The government will raise about 15 billion pounds by selling two-thirds of its stake in Royal Bank of Scotland. Meanwhile, reclassifying non-profit housing associations as private companies enabled the government to shift debt equivalent to 3.2 percent of GDP off its books.
Yet Hammond is hardly showering the population in gifts. The government is spending about 600 million pounds a year to scrap stamp duty on buying a home for first-time buyers. That policy is likely to just push up house prices even further - transferring cash from taxpayers to existing property owners.
Hammond also set aside an additional 3.4 billion pounds for the state-funded health service. But he pledged to spend almost as much on unspecified Brexit preparations. It’s an added reminder of the economic costs of Britain’s decision to leave the EU, even though the formal exit date is still 16 months away. The straitjacket will only get tighter.
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