Will the Spring Statement be a Damp Squib?

Wednesday's statement from the Chancellor Philip Hammond follows on from Theresa May's Brexit defeat in the Commons yesterday, so it's unlikely we'll see many new measures

David Brenchley 13 March, 2019 | 8:23AM
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Philip Hammond, chancellor, Spring Statement, Spring Statement preview, Brexit

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This week’s UK political diary is a packed one. Tuesday saw Theresa May’s deal with the European Union rejected once again, with a further vote, this time on a possible no-deal Brexit, due on Wednesday. Should no-deal be rejected, we’ll likely have a third vote on whether to delay Article 50.

Amid all this drama, there’s the small case of the Spring Statement on Wednesday just after midday. With the Budget having been moved to the Autumn, March’s statement from the Chancellor of the Exchequer is expected to be light on new measures, especially with the new tax year just weeks away.

With such immediate uncertainty regarding Brexit, Wednesday’s version will probably be a non-event. Sanjay Joshi, head of fixed income at London & Capital, dubs it “a review out of place and out of context”.

In fact, claims Richard Stone, chief executive of The Share Centre, it’s conceivable that the event could be postponed in order to give Parliament more time to debate Brexit.

Should that not happen, and Philip Hammond does go ahead with his speech, experts outline what is likely to be said below.

GDP Growth

The statement is likely to open with forecasts of near-term GDP growth from the Office for Budget Responsibility (OBR) being downgraded.

“Since most of the news on the economy since the October Autumn Budget has been unfavourable, the Chancellor is unlikely to get a helping hand from the OBR’s economic projections,” saysGabriella Dickens, assistant economist at Capital Economics.

Dickens thinks forecast GDP growth for 2019 will be eased from 1.6% to 1.3%. “And [the OBR] will probably leave its forecasts well below the consensus and our own beyond 2021,” she adds.

But the cash the OBR will probably take away from Hammond will likely be recouped by surprisingly strong public finance figures we’ve seen in recent months, says Paul Dales, chief UK economist at Capital Economics.

Karen Ward, chief market strategist at JP Morgan Asset Management, agrees, predicting the improvement in the UK’s public finances is likely to be the main theme of the Statement. “Public borrowing is now a fraction of what it was a few years ago,” Ward explains. “Government debt as a percentage of GDP is finally on a downward trajectory.”

Dale adds that Hammond will likely want to “show that at a time of extreme political instability and economic uncertainty, the public finances are in good health and an end to austerity is around the corner… as long as MPs agree to leave the EU with a deal”.

Will We See Any Measures Announced?

But what about policies? Well, as Dale notes, Hammond has said before that the Spring statement isn’t the place to announce new measures. Indeed, he continues: “Until the Chancellor knows what’s happening with Brexit, it makes perfect sense for him to sit tight and save the £17bn of spare cash for another time.”

Joshi recalls that support of up to £500 milliona year for disadvantaged regions has been mooted, though that, too, may hinge on the outcome of the Brexit votes.

Unsurprisingly, considering this is probably a “holding exercise”, leaks have been few and far between. One we saw on Friday was potential for a ramping up of regulation on the gambling sector, leading shares in some of the UK’s top bookmakers, including GVC – the owner of Ladbrokes – William Hill and Paddy Power Betfair to fall.

One measure Hammond could address is the index-linked Gilt market. Currently, ‘linkers’ are priced off retail price inflation (RPI), but a recent House of Lords Economic Affairs Committee suggested this be stopped.

Instead, the report said, the Government should begin to issue consumer price index-linked Gilts. “We heard evidence to suggest there was sufficient demand to make a viable market,” the report read.

It wouldn’t be the first time this has been considered, with a UK Debt Management Office consultation in 2011 deciding against it. But Mark Capleton, rates strategist at Bank of America Merrill Lynch, thinks we do need a CPI market for many reasons.

A leading reason being because it would align the Gilt market better to actual inflation. It should also be the first step to decommissioning RPI, he adds. “A decision to consult again on the merits of CPI issuance would make a lot of sense.

“The Spring Statement, when the Treasury issues its Debt and Reserves Management Report, would be a natural time to announce such a step.”

Moving on from measures that could be in the statement, one thing Stone believes consumers will be hoping not to hear changes to are pensions, ISAs and the likes. “A statement which simply maintains the status quo in terms of tax rates and reliefs, investment accounts and other related incentives will be welcomed,” he says.

“Personal investors certainly do not want any more change or uncertainty added into the mix.”

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David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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