By Jason Douglas
LONDON -- U.K. Treasury chief Philip Hammond signaled a new course after almost a decade of belt-tightening on Wednesday, saying he expects billions in extra borrowing over the next few years to support an economy predicted to slow as it exits the European Union.
In an annual fall statement to Parliament, Mr. Hammond laid out the government's most-detailed assessment yet of the economic effects of the June vote to leave the EU and how it intends to respond.
He also announced a series of small measures aimed at boosting the incomes of working families, whose frustration at lopsided economic growth officials and pollsters say is a driving force behind a populist wave in Europe and the U.S.Presenting official forecasts from the U.K.'s independent budget watchdog, Mr. Hammond said economic growth will be slower over the next few years than predicted before the referendum and government borrowing more than GBP100 billion ($124 billion) higher than planned.
Still, the predicted slowdown is much less stark than some had feared before the referendum, and comes after data showed robust growth in the three months immediately after the vote. Mr. Hammond said the economy's resilience had "confounded commentators at home and abroad."
Formally abandoning his predecessor's target of closing the U.K.'s budget deficit by 2020, Mr. Hammond said the government will instead seek to close the gap "as soon as possible" after elections slated for 2020.
The move toward higher borrowing represents a break with a yearslong focus on eliminating the budget deficit that has been central to Conservative-led government's policies in the U.K. since 2010. A similar shift is under way in other advanced economies, including Canada and, to a lesser extent, Germany. In the U.S., investors have sent stocks and the dollar higher in anticipation of higher fiscal spending by President-elect Donald Trump.
It also highlights the challenge facing Britain as it takes the unprecedented step of exiting the 28-member European club it has been part of for more than 40 years. Mr. Hammond held back for now on a large stimulus, instead focusing his fire on investment spending to address weaknesses including poor productivity, saying his aim was getting the U.K. ready for Brexit.
"Our task is to prepare our economy to be resilient as we exit the EU, and match-fit for the transition that will follow," Mr. Hammond said.
Growth will slow to 1.4% in 2017 from 2.1% this year, according to the U.K.'s Office for Budget Responsibility, before gradually picking up again in 2018 and beyond. The forecast chimes with that of the Bank of England, and assumes the U.K. leaves the EU in 2019 as Prime Minister Theresa May plans.
The anticipated slowdown reflects a coming squeeze on consumer spending from accelerating inflation linked to the falling pound as well as the damping effect on business investment of uncertainty over the U.K.'s economic outlook.
Those effects are expected to sap tax revenue and push up government spending, Mr. Hammond said, resulting in wider budget deficits in years to come. On current projections, the government will still be spending more than it takes in taxes by early 2022.
He confirmed the government's intention to press ahead with plans announced in March to cut the main corporate tax rate to 17% by 2020, while tweaking some rules to prevent big firms offsetting past losses against their tax bills.
Higher borrowing also reflects plans to invest more in roads, railways, internet connectivity and other growth-friendly infrastructure projects, Mr. Hammond said. In all, the government expects to borrow GBP122 billion more over the next five years than was forecast in March, of which almost GBP60 billion represented the direct hit to public finances from the Brexit vote, according to the OBR.
U.K. government bonds edged lower as Mr. Hammond laid out his plans, though sterling and U.K. stocks were little moved. The yield on the 10-year government bond was last up around by 0.06 percentage point on the day at 1.448%, according to Tradeweb. Part of the rise in yields, which gain as prices fall, followed the release of strong U.S. economic data that sent global bond yields higher.
--Paul Hannon and Christopher Whittall contributed to this article.
Write to Jason Douglas at email@example.com
(END) Dow Jones Newswires
November 23, 2016 13:55 ET (18:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.