The Chancellor of the Exchequer announced plans to launch a three-year spending review if a Brexit deal can be agreed, as he warned MPs of the dangers of crashing out of the European Union.
Presenting his spring statement to the House of Commons on Wednesday afternoon, Philip Hammond said there could be a “deal dividend” as business confidence and investment picked up again, giving the UK an “economic boost”.
But he warned the economy would be at risk if a “smooth and orderly” exit from the European Union was not agreed. “Leaving with no-deal would mean significant disruption in the short and medium term…and a smaller, less prosperous economy in the long term,” he said. “Higher unemployment, lower wages, higher prices in shops: that is not what the British people voted for in June 2016.”
Theresa May's Brexit deal, which she agreed with Brussels at the end of 2018, was voted down for the second time on Tuesday evening. Politicians will on Wednesday night vote on the prospect of leaving without a deal, and if that fails, on trying to secure a short extension to Article 50.
The Chancellor said he was confident a deal would be agreed, however, and if it is was, he would launch the three-year review to decide how much of the “deal dividend” could be released. The review would be concluded alongside the Budget in the autumn and will look at social care, schools, the environment and the police.
UK GROWTH FORECASTS
Hammond also unveiled revisions to UK economic growth forecasts from the Office for Budget Responsibility, including reducing this year's estimate to just 1.2%.
That is a reduction from the last Budget, when economic growth of 1.6% was predicted.
The forecast for 2020 was left unchanged at 1.4%, however, while estimates for 2021 and 2022 were increased to 1.6% for each year, on the basis that the UK leaves the EU on 29 March in a orderly fashion with a transition period to December 2020. Previously the OBR had predicted growth of 1.4% for 2021 and 1.5% in 2022.
Public sector net borrowing in 2019/20 is forecast to fall to Â£29.3bn, down from the Â£31.8bn forecast at the budget, with the cumulative forecast between 2018/19 and 2023/23 was revised down by nearly Â£30bn to Â£119bn.
Hammond said the economy was “remarkably robust”, despite the “cloud of uncertainty” caused by Brexit.
Other highlights from the statement included an extra Â£100m to tackle knife crime, a Â£3bn Affordable Homes Guarantee scheme and a reduction in borrowing. Hammond said borrowing in 2019 would be 1.1% of GDP, Â£3bn lower than forecast in the autumn.
A TURNING POINT IS REACHED?
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The lower borrowing forecast primarily reflects an upward revision to the forecast for income tax receipts and a reduction in the forecast for debt interest payments, following the recent fall in gilt yields.”
He added there was “substantial scope for fiscal stimulus in 2020”, provided a no-deal Brexit was avoided. “Little appetite remains among MPs or the wider public for more austerity. Accordingly, we think that a turning point has been reached: fiscal policy no longer will dampen the economy, strengthening the case for the Monetary Policy Committee to raise interest rates shortly after the economic disruption created by Brexit uncertainty has faded.”
Philip Smeaton, chief investment officer of Sanlam UK, said: “Despite the long shadow cast by the Brexit drama, Philip Hammond came to the House of Commons with positive news on tax receipts, meaning that the government is on course to have a smaller deficit in this financial year.
“While in theory this should give the Chancellor greater wriggle room, he was at pains to point out that the purse strings won't be loosened until there is greater clarity around the UK's future relationship with the EU. More than anything, today's statement had a very clear motive: to dangle the prospect of a deal dividend in front of MPs who may still change their mind and vote for Theresa May's Withdrawal Agreement if it comes back for a third time.”
The CBI's chief economist, Rain Newton-Smith, said it was an “admirable attempt to set out a long-term vision for the UK economy” against a hugely uncertain political backdrop. “This year's forecast downgrade brings the danger of no deal to the UK economy sharply into view. It must be avoided.”
Edwin Morgan, interim director general of the Institute of Directors, said: “Warm words and proposed consultations are not enough for businesses at a time when confidence is rock bottom and investment plans are eroding away, and many will find it difficult to tread water until more decisive action at the Autumn Budget.
“While no deal would wreak certain havoc for many firms, we must also avoid being lulled into thinking an exit deal alone is a substitute for providing a real economic impetus that lowers costs, spurs productivity growth, and supports businesses as they adjust to Brexit, whatever its form.”