Chancellor Philip Hammond used his Spring Statement to outline the fallout from a no-deal Brexit as the UK growth forecasts were slashed a post-crash low.
Hammond used the economic update that he had billed as a ‘fiscal non-event’ to warn MPs of the risks of leaving the EU without a deal, following a second historic parliamentary defeat for prime minister Theresa May last night.
With no solid plan to leave the EU on 29 March, coupled with a slowdown in global growth, the Office for Budget Responsibility (OBR) cut its forecast for 2019 UK economic growth to 1.2%, from 1.6% at the time of October's Budget.
On a rolling 12-month basis it is the lowest figure since the end of the last recession. The OBR left its 2020 forecast unchanged at 1.4% but raised its 2021 forecast to 1.6%, up from 1.4%
Hammond said the uncertainty around Brexit had left the country under a ‘cloud of uncertainty’ but despite this, the economy had ‘defied expectations’ and was ‘remarkably robust’.
Proof of this came from the OBR’s forecast the government would borrow £29.5 billion less over the next five years thanks to £33.7 billion more being collected in income tax and a £21.4 billion reduction in debt interest, Hammond said.
The chancellor talked up the fall in borrowing, lower debt, and increased job creation, which has left the government with £26.6 billion of fiscal headroom to weather the fallout from a no-deal Brexit. However, it won’t be enough to prevent ‘significant disruption’ to the economy should the UK crash out without a deal.
'Not what the British people voted for'
He warned of a ‘short to medium-term reduction in the productive capacity of the economy’ and a ‘smaller, less prosperous economy in the long term, than if we leave with a deal’.
Hammond also used his speech to warn there was no quick-fix fiscal or monetary policy solution to the disruption a no-deal exit would create, reiterating that any tax or spending response, or any Bank of England tweaks to policy, would be temporary to combat a spike in inflation.
‘The idea that there is some readily available fix to avoid the consequences of a no-deal Brexit is, I am afraid, just wrong,’ he said.
‘Higher unemployment, lower wages, higher prices in the shops. That is not what the British people voted for in June 2016.’
Earlier today, the government unveiled plans for a no-deal scenario that would cut tariffs to zero on 87% of imported goods, although prices of meat, shoes, cheese, and cars would rise.
For all his warnings over a no-deal exit, Hammond said he was ‘confident’ a deal would be agreed and subsequently provide a ‘deal dividend’ as companies release capital that has been stockpiled amid the political uncertainty.
The destination for the £26.6 billion windfall – almost double what was forecast last October - would be decided in the looming spending review, said Hammond.
Philip Smeaton, chief investment officer at Sanlam UK, said the Spring Statement had a ‘very clear motive’, which was to ‘dangle the prospect of a "deal dividend" in front of those MPs who may still change their vote for May’s withdrawal agreement if it comes back for a third time’.
Institute of Fiscal Studies director Paul Johnson said the chancellor had 'kept his powder dry in terms of potential extra spending...waiting for outstanding Brexit uncertainty to dissipate before making his spending review decisions'.
Smattering of sweeteners
Plans to splash some cash post-Brexit would no doubt help with the transition out of the EU but Hammond already has a jump on this, using his speech to unveil a few sweeteners.
In a bid to boost productivity, Hammond brought forward a £700 million package of reforms aimed at helping small businesses take on more apprentices, which was originally announced in the autumn Budget but is being brought forward to the start of the new financial year.
There was further help for homebuyers via a £3 billion guarantee scheme that Hammond said would deliver an additional 30,000 affordable homes. This is coupled with £717 million from the Housing Infrastructure fund to create 37,000 new homes in specific sites, including Cheshire and Didcot.
Hargreaes Lansdown analyst Laith Khalaf said that while the Treasury had reconfirmed its commitment to providing housing, the OBR expects hardly any growth in house prices this year or next, assuming a smooth Brexit.
'That trend isn't a great reflection of the health of property market or the UK economy, and it suggests things are going to get tougher for the UK's housebuilders,' he said.
Another £100 million was given to the police to pay for overtime in a bid to tackle the growing problem of knife crime and £79 million was provided to support the ‘Archer 2’ supercomputer at Edinburgh University.
And following a campaign around period poverty, the government will fund free sanitary products in secondary schools and colleges in England from the next school year.