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UK Budget: Spend now, before it’s too late - Nomura

In view of analysts at Nomura, this was a big and bold Budget from Chancellor Hammond, who decided to spend rather than save this year’s better deficit news – in spite of OBR warnings that weaker productivity would damage growth and the fiscal outlook further ahead.

Key Quotes

UK growth: Downward revisions to economic growth were well flagged ahead of this Budget – thanks to slower-than-expected outturns earlier this year and the Office for Budget Responsibility (OBR) finally accepting that productivity would recover at a far slower rate than had been previously projected. As a result, economic growth was cut on average by 0.4pp per year in coming years – the economy is now expected to expand by just 1.4% on average per year.”

Deficit forecasts: Better monthly fiscal outturns led to downward revisions to this year’s budget deficit. However, the combination of weaker economic growth in the future (productivity-related) and increased spending by the government in a host of measures announced today have led to higher deficits from 2019-20 onwards.”

Gilt issuance: We had expected the Debt Management Office to lower its planned Gilt sales for the current fiscal year. However, in the event Gilt sales were lifted as the fall in the cash deficit this year was more than offset by lower funding from National Savings & Investments. Further ahead, the financing requirement (and thereby expected Gilt sales) has been revised up sizably – by a cumulative £60bn in the three years from 2019-20 to 2021-22 – as increased government spending and slower economic growth take their toll.”

Budget announcements: There were plenty of big ticket items announced in yesterday’s Budget. The biggest announcements (in cost/revenue terms) were: abolishing first-timebuyer stamp duty for house sales up to £300k, additional spending on the NHS, freezing fuel duty increases (again), spending on preparations for EU exit, bringing forward the uprating of business rates to CPI, various tax avoidance and evasion measures, and freezing the corporation tax indexation allowance.”

Fiscal stance: The aggregate cost to the Treasury of the measures Mr Hammond announced today (including those announced since the last Budget in March) was some 0.3% of GDP in 2018-19 and 0.5% the following year (£6bn and £10bn respectively), clearly marking a fiscal loosening by the Treasury. Indeed, on this metric the loosening was larger than that announced in last year’s Autumn Statement following the vote to leave the EU. This will not go unnoticed by the Bank of England (BoE), strengthening our view that the MPC will raise interest rates twice (more than consensus forecasts) next year.”

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