Chancellor of the Exchequer, Philip Hammond (C) presents the red Budget Box with ministers (L-R) Exchequer Secretary to the Treasury, Robert Jenrick, Chief Secretary to the Treasury, Elizabeth Truss, Financial Secretary to the Treasury, Mel Stride and Economic Secretary to the Treasury, John Glenn, as he departs 11 Downing Street to deliver his 2018 budget announcement to Parliament on October 29, 2018 in London, England

16 Nov 2018

Budget 2018: bonanza before Brexit

Philip Shaw and Victoria Clarke

Investec economists

Chancellor of the Exchequer avoids pitfalls in difficult political landscape as fall in deficit offsets pressure on public finances

Philip Hammond delivered his third Budget on Monday afternoon. In a difficult political climate he has avoided a few potentially debilitating pitfalls recently.


One was that by holding the Budget Statement on Monday, instead of Wednesday, he sidestepped a volley of vampire-type Halloween based headlines. And while there was talk of a Chancellor quitting earlier in the day, the subject was Angela Merkel rather than himself.


In our Budget preview we argued that Mr Hammond faced an unusual combination of circumstances in preparing his Budget. On one side, the deficit is closing more rapidly than expected at the time of his Spring Statement in March.


On the other, the public finances are under greater pressure over the longer-term, not least due to the PM’s commitments to the health service and "ending austerity". His approach was straightforward – spend the budgetary windfall and concentrate on the NHS.


The Chancellor made a lot of the OBR’s forecast of meeting his relevant fiscal rules.

The numbers are considerable. Last year we talked about a meaningful fiscal stimulus in the third year of the forecast of £9.9bn. The equivalent numbers this year are £2.3bn this year, £15.1bn next, rising to £30.6bn by 2023/24. Almost needless to say, this is a considerable fiscal expansion.


The Chancellor made quite a lot of the OBR’s forecast of meeting his relevant fiscal rules early. Indeed, the (cyclically adjusted) deficit is estimated to have been below 2% of GDP last year (three years early). Meanwhile outstanding debt is expected to be falling rapidly as a percentage of GDP in the targeted year of 2020/21.


But Mr Hammond said nothing about balancing the Budget by 2025, his broad aim. Perhaps unsurprisingly, political imperatives have overtaken strict fiscal orthodoxy.


Forecasted Budget deficit in in 5 years' time
Forecasted debt, as a % of GDP, in 5 years' time

We should stress that a budget deficit of below 1% of GDP in five years or so’s time is relatively respectable. The point of concern is that debt as a percentage of GDP is still envisaged to be relatively high at 74.1%.


An economic shock, were it to occur could raise this to dangerous territory. We would also make the point that a squeeze will remain on other areas of public services. We will not know for sure quite how much until next year’s Spending Review (SR), which will finalise the ‘envelope’ and clarify the allocation of cash across the various departments.


But we suspect that while austerity might be perceived to have ended in the NHS, this may not be the case in other areas of government. Hence Monday's Budget is probably not a "get out of jail free card" in terms of overall political pressure on expenditure.


The OBR’s economic forecasts have a similar look and feel to them from seven months ago. However in terms of interest rate policy, the extent of fiscal stimulus will make the Monetary Policy Committee more rather than less inclined to tighten policy.


We may get a qualitative assessment from Mark Carney at Thursday’s Inflation Report press conference. However the Budget measures were unlikely to be known in time for the MPC to assess them within its formal forecasting process.


This is convenient as it gives the committee the chance to see how Brexit developments pan out. Of course a disruptive no deal could alter the economic landscape abruptly, and with it the policy outlook.

Download the full note from our economics team PDF 730.79 KB




Few changes to borrowing, huge policy shift

As we mentioned above, the policy give away has been considerable, rising above £30bn in 2023/24. The specific measures are discussed below, but from an overallcost perspective they are largely offset by a handful of revenue raising measures and the improvement in public finances which has unfolded over the course of this financial year.


The OBR’s borrowing forecast for 2018/19 has been lowered to £25.5bn from (a restated) £36.2bn in March. But thereafter there is little or no improvement in the profile (see Table 1 within full report). As the OBR explains, the "in-year judgements" provide a budgetarywindfall for the Exchequer.


Table 2 in the full report also shows that a change in the OBR’s judgement on "equilibrium unemployment" (a wider than expected output gap) also helps here. But the favourable effects are all spent (and more).

The latest profile for borrowing (beyond the current year) is in the same ballpark as that published in March. By 2023/24 the deficit is reckoned to be £19.8bn, or 0.8% of GDP. Again as referenced above, there seems little attempt here to square the books, for obvious political reasons.


We would reinforce the point that simply looking at the borrowing profile masks what is going on. A significant dividend is being spent. The OBR makes the point that were it not for the Chancellor’s policy decisions, the public finances would enjoy a small surplus in five years’ time.


The budgetary watchdog acknowledges that Mr Hammond is on course to meet his fiscal targets. His fiscal mandate (cyclically adjusted borrowing to be below 2% of GDP in 2020/21) was hit last year i.e. three years early.


The OBR makes it clear that eliminating the deficit by 2025/26 is even more challenging than seemed the case in March.

On debt, his rule is that PSND to GDP should be falling in 2020/21. This is forecast to be dropping sharply in the target year and is in fact expected to decline this year. Separately (and following various reclassifications) the OBR also expects the government to undershoot its welfare cap (including margin) by £6.0bn in 2022/23.


However the OBR makes it clear that eliminating the deficit by 2025/26 is even more challenging than seemed the case in March. Indeed our guess is that despite today’s Budget, political pressures on the government to spend more will remain over the next couple of years. Hence any further "windfalls" are likely to be spent rather than banked.


Furthermore, while we remain of the view that a disorderly Brexit is unlikely, should this occur, then negative economic consequences are likely to follow. In such an instance the public finances would look very different indeed.




Economic forecasts similar amidst Brexit uncertainty...

The OBR published an updated set of growth forecasts, underpinning its new fiscal projections. The broad shape of these was relatively similar to the projections published at the time of the Spring Statement with the independent forecasting office continuing with its “broad brush” Brexit assumptions, rather than working offany specific Brexit deal.


At home, GDP growth for the current year was pushed down to 1.3% (was 1.5%) whilst there was an upgrade to the 2019 forecast to 1.6% (was 1.3%). However, despite the chunky fiscal giveaway, overall there was relatively little change in the medium-term UK growth positon, which now envisages growth in a range of 1.4%-1.6% over the period to 2023 (was 1.3%-1.5% out to 2022).


Overall, the economic backdrop was not a key driver of the shift in the fiscal projections laid out today. As explained above this came from the planned (very material) loosening of the purse strings. The key macroeconomic forecasts are summarised below.

Chancellor of the Exchequer Philip Hammond talks with Eminox managing director Mark Runciman and supply manager Rachel Eldridge during a post-Budget visit on Tuesday 30 October




Fiscal Phil feeling less thrifty

Amidst the tense political backdrop which has existed in the run up to this Budget, including continuing debate over whether Prime Minister Theresa May will face a leadership challenge soon, she has been busy making various spending promises to try and shore up the support of her colleagues and the electorate.


Indeed, at the recent Conservative party conference the Prime Minister pledged to end austerity. She also insisted that we would not see the end of responsibility although she left her Chancellor with quite a shopping list, which was laid bare in today’s Budget.




More than just some money for the NHS

The flagship pledge made by the Prime Minister, back in June, was her promise that the NHS budget would be expanded materially. The Chancellor confirmed this again on Monday stating that the NHS “is the public’s number one priority and the government will increase its budget by £20.5bn after inflation by 2023-24”. Monday's Budget included £7.4bn for the next fiscal year and £11.1bn for this in 2020/21, rising to £27.6bn by 2023/24. Other big spending commitments are listed below - note this is not an exhaustive list:


  • Mr Hammond made a costly pledge to deliver on the manifesto promise to raise the personal allowance by £650 to £12,500 and the Higher Rate Threshold from £46,350 to £50,000 in April 2019, a year earlier than planned. This comes at an estimated cost of £2.8bn in 2019/20 and £1.9bn in 2020/21.


  • More cash to smooth the introduction of Universal Credit was set out, with the scheme coming under increasing pressure of late. Here £1.7bn was made available; the Chancellor said this would mean working parents and people with disabilities claiming Universal Credit will be £630 better off each year.


  • Alongside the extra cash earmarked for the NHS we also saw the Chancellor dish out further cash for social care, with local authorities in England set to receive a further £650m next year.


  • At the recent Conservative Party conference the Prime Minister again promised to personally fix the broken housing market. Today we heard the Chancellor commit the government to raising councils’ borrowing cap (on how much councils could borrow against the value of their housing stock) so they are able to fund more housebuilding. There was also extra cash for Scotland, Wales and Northern Ireland to spend in devolved areas, including education, health and housing.


  • Also on the housing front, note that the Chancellor announced the government is extending first-time buyers' relief in England and Northern Ireland so that “all qualifying shared ownership property purchasers can benefit, whether or not the purchaser elects to pay SDLT on the marketvalue of the property”. This looks to be a relatively cheap "gift" from government, at a cost of £5m in 2019/20.


  • A £28.8bn National Roads Fund, paid for by vehicle excise duty, including £25.3bn for the Strategic Road Network was set out.


  • On duties, it was confirmed today that fuel duty will be frozen again, costing £840m next year. Most alcohol duties were also frozen (spirits, beer and cider) costing the exchequer another £170m next fiscal year and more over the subsequent years.


  • Finally note that Mr Hammond pledged £1.5bn to support the high street. Specifically here we had the news that small retail businesses will see their business rate bills cut by a third for two years from April 2019, saving them £900m.
Chancellor of the Exchequer, Philip Hammond, presents the red Budget Box as he departs 11 Downing Street to deliver his 2018 budget announcement to Parliament on October 29, 2018 in London, England. The Chancellor's budget speech is the last before the official Brexit date next year of March 29, 2019
Philip Hammond, Chancellor of the Exchequer

Large social media platforms, search engines and online marketplaces will pay a 2% tax on the revenues they earn which are linked to UK users.




Revenue raisers in the shadows

The Budget was very much about giveaways, but any Chancellor, no matter how much political pressure is faced, will feel compelled to look to raise some revenue where possible. Clearly the scale of the revenue raising measures announced today do not match up to the promises, but there were some of note as listed below - again this is not an exhaustive list.


  • A new digital services tax was unveiled where from April 2020 “large social media platforms, search engines and online marketplaces” will pay a 2% tax on the revenues they earn which are linked to UK users. This is expected to bank £440m a year for the exchequer by 2023/24.


  • On the small company front, the threshold at which companies start paying VAT has been frozen at £85,000 for a further two years.


  • The Chancellor earmarked the extension of reforms to “off-payroll working”to the private sector as another source of revenue, where he looks for this to bring in £1.2bn at its peak in 2020/21.


  • As part of its wider strategy on tackling single-use plastic waste, Mr Hammond announced he will introduce a tax on the production and import of plastic packaging from April 2022. The details of this will be subject to consultation.




Back to Brexit and then to the next fiscal event

Monday's big giveaway Budget is quite clearly a concerted play by the Chancellor and his Prime Minister to build up the support of the electorate and in achieving thisit has sought to ensure the end of austerity message reaches the “man on the street”.


It is, of course, but particularly so this time, designed make the opposition’s life more difficult, with the Budget loosening the purse strings by so much. The Prime Minister and her Chancellor will clearly be hoping this helps to see off the threat of a leadership challenge.


Note that as material as Monday's Budget’s announcements are, these do still mark the start of a new fiscal process as we move towards Spending Review 2019 (SR2019); today Mr Hammond announced his indicative 5-year path fordepartmental spending, which will grow by an average 1.2% a year in real terms, with further funding expected from the Brexit deal “dividend”.


Here Mr Hammond expects that if Brexit goes to plan, he gets extra fiscal wiggle room from a better economic backdrop and from being able to re-divert his Brexit contingency fund.


Mr Hammond expects that if Brexit goes to plan, he gets extra fiscal wiggle room from a better economic backdrop.

As Mr Hammond has indicated, if Brexit is smoother than this, the Chancellor will be looking to bank his “double dividend” which will no doubt make the spending-round process less uncomfortable, though we note that spending reviews are never comfortable experiences. Note that we do not yet know the precise timing of SR2019.


That will depend on how smooth the UK’s path through Brexit is as will thetiming of the next Budget. Mr Hammond again indicated that, depending on the pathof Brexit, another extra Budget could be forthcoming too.


Note finally, Prime Minister Theresa May is probably breathing a sigh of relief after the government’s confidence and supply partner - the Democratic Unionist Party - said it will support the Budget, having previously threatened to vote against it.


With Budget votes (at least prior to the Fixed-term Parliaments Act, which put certain confidence motions on a statutory basis for the first time) seen as effective confidence votes this looked to be problematic. For now, that looks to be one imminent challenge to Prime Minister May averted.

Download the full note from our economics team PDF 730.79 KB

Discover how you can benefit from Investec's products and services

  • Disclaimer

    For the purposes of this disclaimer, “Investec Securities” shall mean: (i) Investec Bank plc (“IBP”); (ii) Investec Bank plc (Irish Branch); (iii) Investec Bank Limited (“IBL”); (iv) Investec Australia Limited (“IAL”); (v) Investec Capital Asia Limited (“ICAL”); (vi) Investec Capital Services (India)  rivate Limited; (vii) Investec Singapore Pte. Ltd (“ISPL”) and from time to time, in relation to any of the forgoing entities, the ultimate holding company of that entity, a subsidiary (or a subsidiary of a subsidiary) of that entity, a holding company of that entity or any other subsidiary of that holding company, and any affiliated entity of any such entities. “Investec Affiliates” shall mean any directors, officers, representatives, employees, advisers or agents of any part of Investec Securities. This document has been issued solely for general information and should not be considered as an offer or solicitation of an offer to sell, buy or subscribe to any securities or any derivative instrument or any other rights pertaining thereto. This document may have been issued to you by one entity within Investec Securities in the fulfilment of another Investec Securities entity’s agreement to do so. In doing so, the entity providing this document is in no way acting as agent of the entity with whom you have any such agreement and in no way is standing as principal or a party to that arrangement.


    The information in this document has been compiled by Investec Securities from sources believed to be reliable, but neither Investec Securities nor any Investec Affiliates accept liability for any loss arising from the use hereof or makes any representations as to its accuracy and completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this document. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied is made regarding future performance. The information in this document and the document itself is subject to change without notice. This document as well as any other related documents or information may be incomplete, condensed and/or may not contain all material information concerning the subject of the research and/or its group companies (including subsidiaries): its accuracy cannot be guaranteed. There is no obligation of any kind on Investec Securities or any Investec Affiliates to update this document or any of the information, opinions, forecasts or estimates contained herein. Investec Securities (or its directors, officers or employees) may, to the extent permitted by law, act upon or use the information or opinions presented herein, or research or analysis on which they are based prior to the material being published. Investec Securities may have issued other documents or reports that are inconsistent with, and reach different conclusions from, the information presented in this document. Those reports and/or documents reflect the different assumptions, views and analytical methods of the analysts who prepared them. This document does not contain advice. Specifically, it does not take into account the objectives, financial situation or needs of any particular person. Investors should not do anything or forebear to do anything on the basis of this document. Before entering into any arrangement or transaction, investors must consider whether it is appropriate to do so based on their personal objectives, financial situation and needs and seek financial advice where needed. No representation or warranty, express or implied, is or will be made in relation to, and no responsibility or liability is or will be accepted by Investec Securities or any Investec Affiliates as to, or in relation to, the accuracy, reliability, or completeness of the contents of this document and each entity within Investec Securities (for itself and on behalf of all Investec Affiliates) hereby expressly disclaims any and all responsibility or liability for the accuracy, reliability and completeness of such information or this document generally.


    The distribution of this document in other jurisdictions may be prohibited by rules, regulations and/or laws of such jurisdiction. Any failure to comply with such restrictions may constitute a violation of United States securities laws or the laws of any such other jurisdiction. By accepting this document, you confirm that you are an "institutional investor" and agree to be bound by the foregoing limitations. This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or disclosed to another party,  without the prior written consent of an entity within Investec Securities. In the event that you contact any representative of Investec Securities in connection with receipt of this document, including any analyst, you should be advised that this disclaimer applies to any conversation or correspondence that occurs as a result, which is also engaged in by Investec Securities and any relevant Investec Affiliate solely for the purposes of providing general information only. Any subsequent business you choose to transact shall be subject to the relevant terms thereof. We may monitor e-mail traffic data and the content of email. Calls may be monitored and recorded. Investec Securities does not allow the redistribution of this document to non-professional investors or persons outside the jurisdictions referred to above and Investec Securities cannot be held responsible in any way for third parties who effect such redistribution or recipients thereof. © 2018


    Third party research disclosures

    This report has been produced by a non-member affiliate of Investec Securities US (LLC) and is being distributed as third party research by Investec Securities (US) LLC in the United States. In the United States, this report is not intended for use by or distribution to entities that do not meet the definition of a Major US Institutional Investor, as defined under SEC Rule 15a-6, or an Institutional Investor, as defined under FINRA Rule 4512 (c), or for use by or distribution to any individuals who are citizens or residents of the United States. Investec Securities (US) LLC accepts responsibility for the issuance of this report when distributed in the United States to entities who meet the definition of a US Major Institutional Investor or an Institutional Investor

  • Investec Securities

    In the United Kingdom refers to Investec Securities a division of Investec Bank plc.
    Investec Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange.

    Registered in England No. 489604

    Registered Office Address: 30 Gresham Street, London EC2V 7QP


    In Ireland refers to Investec Bank plc (Irish Branch) Investec Bank plc (Irish Branch) is authorised by the Prudential Regulation Authority in the United Kingdom and is regulated by the Central Bank of Ireland for conduct of business rules.

    Registered in Ireland No. 904428
    Registered Office Address: The Harcourt Building, Harcourt Street, Dublin 2


    In South Africa refers to Investec Bank Limited an authorised financial services provider and a member of the JSE Limited.

    Registered in South Africa No. 1969/004763/06

    Registered Office Address: 100 Grayston Drive Sandown, Sandton 2196, South Africa


    In Australia refers to Investec Securities a division of Investec Australia Limited. Investec Australia Limited is authorised and regulated by the Australian Securities & Investments Commission (Licence Number 342737, ABN 77 140 381 184)

    Registered Office Address: Level 23, Chifley Tower, 2 Chifley Square, Sydney, NSW 2000


    In Hong Kong refers to Investec Capital Asia Limited a Securities and Futures Commission licensed
    corporation (Central Entity Number AFT069). Registered Office Address: Suite 3609, 36/F, Two International Finance Centre 8 Finance Street, Central Hong Kong


    In India refers to Investec Capital Services (India) Private Limited which is registered with the Securities and Exchange Board of India, the Capital Market regulator in India as a research analyst,

    Registration number INH000000263.

    Registered Office Address: Unit no 607, 6th floor The Capital, Plot no C-70, GBlock, Bandra Kurla Complex, Bandra East, Mumbai 400051

    In Singapore refers to Investec Singapore Pte. Ltd. an exempt financial adviser which is regulated by the Monetary Authority of Singapore as a capital markets services licence holder.

    Registration No. 201634931E

    Registered Office Address: 80 Raffles Place #36-09, UOB Plaza, Singapore 048624


    In the United States refers to Investec Securities (US) LLC.
    Registered Office Address: 10 East 53rd Street, 22nd Floor New York, NY 10022


    Further details of Investec office locations, including postal addresses and telephone/fax contact details: