On the 23rd June last year the UK voted by 51.9% to 48.1% to leave the EU. David Cameron resigned, Theresa May moved into 10 Downing Street and swiftly stated that “Brexit means Brexit.”
As it turned out, Brexit couldn’t mean Brexit until she had Parliament’s approval. But last week MPS voted overwhelmingly (by 494 to 122) in favour of triggering Article 50 of the Lisbon Treaty. Thus beginning the formal process of leaving the European Union.
There’ll be plenty of twists and turns in the road and the negotiations are unlikely to go smoothly. Yet as things now stand, the Prime Minister will trigger Article 50 on or before March 31st. and the UK will have left the EU before the next General Election in June 2020.
What type of Brexit will it be?
In the run up to the Referendum, there was much talk about ‘hard Brexit’ and ‘soft Brexit.’ In simple terms, ‘hard Brexit’ meant leaving the European single market. ‘Soft Brexit’ meant leaving the EU, but remaining a member of the single market, with all its costs and implications (such as the free movement of labour).
Many commentators also talked about ‘models.’ Which model would Britain adopt if we left the EU? The Norwegian model? The Swiss model?
It now appears clear our exit from the EU will be ‘hard Brexit.’ It seems highly unlikely the UK will remain a member of the single market. And as Theresa May has said, we’ll be following the ‘British model’ in future relations with the European Union.
The terms will depend on the negotiations and will not follow the blueprint of any other country’s existing arrangements with Europe.
What has the economic news in the UK looked like since Brexit?
‘Surprisingly good’ is the short answer. There were plenty of grim warnings – dubbed ‘Project Fear’ – about the consequences of a Referendum victory for Leave. In the event, very few of those warnings have been borne out by events.
The manufacturing sector – helped by the slide on the value of the pound – enjoyed a very strong end to 2016\. It grew by 2.1% in December and with growth of 1.2% for the final quarter of the year.
There has also been good news from the services sector, and the Bank of England has significantly raised its growth forecasts for the UK economy.
In August of last year, the Bank forecast that economic growth in 2017 would be 0.8%. It subsequently raised that to 1.4% in November. It has now increased the forecast to 2.0%, thanks partly to higher spending and investment from the Government. Something we may well see more of in Philp Hammond’s March Budget.
What is happening in Europe right now?
Europe has much more on its mind than Brexit. Greece’s debt problems have reared their ugly head again (did they ever really go away?) and the left-wing government of Alexis Tsipras is losing popularity by the day.
Meanwhile, elections are due in The Netherlands next month. Here the right-wing Freedom Party is expected to make significant gains. Late April brings the first round in the French Presidential Election. Marine le Pen, the leader of the Front National, is almost sure to go through to the second and final round in early May.
Most significantly of all, elections are due in Germany in September. Angela Merkel is bidding for a fourth term as Chancellor. Yet, she could be surprised by the expected support for the right-wing anti-immigration party, Alternative fur Deutschland.
Economically, Germany continues to be the engine of Europe with the country just reporting a record trade surplus of €252.9bn for 2016\. That’s equal to around £215bn – or a surplus of just under £18bn a month. (In comparison, the UK has a monthly trade deficit of approximately £3bn to £4bn.)
The 2017 Budget
It’s against this economic and political backdrop that Philip Hammond will present his first (and last) Spring Budget on Wednesday, March 8th. In future, the main Budget will be in the autumn. So yes, there’ll be two this year, while the ‘Spring Statement’ will become a response to the Office for Budget Responsibility’s economic forecast.
Philip Hammond is by nature a cautious man. His nickname in the Commons is ‘Spreadsheet Phil’. So don’t expect any fireworks on March 8th. But by looking at the current economic forecasts, and back to last year’s Autumn Statement, we can make some educated guesses at what’s likely to be in the Budget speech.
Hammond started his Autumn Statement speech by praising “the resilience of the British economy.” The Bank of England’s latest upgrade will have been music to his ears. Especially as they are giving the Chancellor – and his commitment to investing in the UK’s infrastructure – much of the credit.
What are we likely to see in the 2017 Budget?
It’s highly probable that there will be more infrastructure investment – in roads and transport links – announced in the Budget.
We’re also likely to see further moves towards to clamp down on what Hammond dubbed ‘middle-class tax perks.’ The Chancellor strikes me as a man who’d like a simple, transparent tax system. His commitment to “a country that works for everyone” suggests he’ll try and remove the loopholes and perks of a privileged few.
Anyone watching a news bulletin lately will know the UK doesn’t have enough houses, and that it faces a growing problem with social care. The Government wants to make it easier for older people to move into smaller homes, freeing up larger properties for families.
Eventually, we would expect the introduction of incentives for this. And for good-quality, new build sheltered accommodation. The Budget may see the Chancellor take a step in this direction or at least signpost future measures.
We could also see more moves to protect those in rented accommodation (following on from the action taken in the Autumn Statement). As well as further steps to release brownfield sites, and surplus government land, and increase the density of projects in towns. Put simply, the UK needs more houses and the Chancellor will _have_ to take steps in that direction.
Will the Chancellor cut taxes?
Our inclination is to say “not much, if at all.” It’s likely major changes to the tax system will wait until the Autumn Budget. By which times the Chancellor will have a much clearer idea of both the economic consequences of Brexit. And of how the negotiations to leave the EU are progressing.
He’s already given a commitment to reduce Corporation tax to 17% “by the end of this parliament”. For now, we’d expect him to keep further options open.
Brexit and the UK Budget: Conclusions
As we’ve just noted, by the time Philip Hammond delivers his second Budget of 2017 he’ll have a much clearer economic picture. He’ll also have seen what effect President Trump’s economic policies are having in the US and what impact the elections in Holland, France and Germany have had on Europe.
So don’t be surprised if he lives up to his reputation for caution when he delivers his speech on March 8th. With another Budget to come later in the year and the almost-certain knowledge he’ll be Chancellor at least until the summer of 2020, he can afford to proceed slowly for now.