By Paul Hannon
U.K. Treasury Chief Philip Hammond Wednesday presented lawmakers with an update on the outlook for the economy and the government's finances.
This was the first reckoning of the likely impact on both following the country's June vote to leave the European Union. With the economy having shown "strength and resilience" since that decision, Mr. Hammond didn't feel the need to offer a large stimulus, instead focusing an increase in investment spending on a longer term weakness: the "shocking" productivity gap between Britain and other economies such as the U.S. and Germany.
Here are five takeaways:
1. The cost of Brexit
While the way in which the U.K. leaves the EU is uncertain, the government's independent budget watchdog saidthat however it happens, it will lead to "lower trade flows, lower investment and lower net inward migration than we would otherwise have seen, and hence lower potential output." It cut its 2017 growth forecast to 1.4% from 2.2% in March, and its 2018 forecast to 1.7% from 2.1%. Thereafter, it sees growth returning to around 2%.
2. More borrowing
With tax revenues set to be lower as a result of weaker growth, Mr. Hammond announced the government would borrow an additional GBP122 billion ($151.11 billion) over the five years to 2021. He abandoned his predecessor's goal of balancing the budget by 2020, and instead introduced two new guidelines for policy, under which the budget deficit should be below 2% of economic output by that time, and the government's stock of debt should be falling as a share of output.
The big new initiative unveiled by Mr. Hammond was a boost to infrastructure, in part through the creation of a GBP23 National Productivity Investment Fund to cover the coming five years. From 2020, Mr. Hammond would like to see investment spending by the government at between 1% and 2% of economic output a year, up from 0.8% now. That would help close a productivity gap that Mr. Hammond said left British workers working longer hours for lower pay. "In the real world, it takes a German worker four days to produce what we make in five," he said.
Although he abandoned the austerity favored by his predecessor, Mr. Hammond didn't just pledge to spend, he took some money back through tax changes, including closing a loophole that allowed workers to enjoy "benefits in kind"--such as gym membership--without paying the same rates as they would on a cash salary. There were also efforts to further clamp down on tax avoidance schemes. But he reaffirmed the government's pledge to reduce the corporate tax rate to 17% by 2020.5. Mr. Darcy
In any budget statement by a U.K. government, someone's cherished cause gets a boost. This time, it was the fans of Jane Austen who were honored, with a pledge to repair Wentworth Woodhouse, the model for Pemberley in the novel "Pride and Prejudice" at a cost to taxpayers of GBP7.6 million.
Write to Paul Hannon at firstname.lastname@example.org
(END) Dow Jones Newswires
November 23, 2016 11:00 ET (16:00 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.