The UK Chancellor of the Exchequer Hammond is set to deliver his first
Autumn budget tomorrow, and it could be his last. The UK government
is fragile. Infighting is notorious. It appears the hardline Brexit
camp does not trust Hammond. A cabinet reshuffle is widely rumored, and Hammond seems vulnerable. Prime Minister
May, who also initially was in the Remain Camp, is said to regard Hammond
suspiciously.
Hammond is understood to be fiscally conservative, but he is hemmed in by
the slowing economy, Brexit uncertainties,
and a weak government. His proposal in the spring to have small
businesses pay more for National Insurance fell flat, and it was quickly
retracted. Another faux pas and his fate in the government could be
sealed.
He may tempt the Fates if he challenges Entrepreneurs' Relief, which
allows directors of companies who own more than 5% of the company to pay just
10% tax on capital gains. The scheme is essentially designed to give
small business owners a tax break but has
been accused of being open to abuse in
the past. If Hammond sets up curbs tomorrow, as
some expect, business owners and
entrepreneurs may seek his head.
Rising house prices in the UK are partly a function of a shortage.
Hammond could allow building in areas that are currently restricted (green belt
land). Hammond may also cut the stamp duty (transaction tax) for
first-time home buyers. The Chancellor may also commit funds for R&D
and technology.
The UK government is already on the hook for GBP500 mln for the next two
years for Northern Ireland as the price of the Democrat Unionist Party that
lends support to the Tory government that lost its majority. The
government is committed to lifting the 1% cap on the salaries of some public
sector employees. The ceiling on university tuition fees will be frozen
next year, and the earnings limit before student debt needs to be repaid is expected to be
increased.
While important for selected constituencies, the budget is expected to be
small beer. Projections of weaker productivity translate into weaker growth, which in turn
weighs on revenues and gives the Chancellor little room to maneuver without
boosting the deficit. Last year was the first year since 2007 that
the UK recorded a budget deficit less than 3% of GDP. It is expected to be little changed this year.
UK primary dealers expected the Debt Management Office to cut projected
issuance by GBP720 mln from the GBP114.2 bln projected in the spring.
This is also small beer but could see long-term yields slip if
true. There had been some talk that the MPC's target is shifted to CPIH, which includes homeowners occupation costs from CPI,
following the Office of National Statistics, but Hammond's office seemed to
play down this possibility. CPI stood at 3.0% year-over-year last
month. CPIH was at 2.8%. On the margins,
lower inflation may be seen as favorable for gilts but negative for
sterling. Recall that Lawson had shifted away from the Retail Price
Index, which is still used for some
things including inflation-linked securities, public
housing rents, and some student tuition. The RPI rose 4.0% in the year
through October.
The most important element of the budget is not about economics but
politics. Many observers see the budget as one of the last
opportunities the Tory government has to bolster its support. Reports
suggest that as many as 40 Tory members of Parliament are prepared to sign a
letter of no confidence in May, eight shy
of the threshold to trigger a leadership challenge. Given the difficult
straits that any government would find itself, it may be a poisoned
chalice. Many investors fear that the only thing worse than the Tories
would be a Labour government.
Disclaimer
Could Hammond's First Autumn Budget be His Last?
Reviewed by Marc Chandler
on
November 21, 2017
Rating: