UK : Bracing for Brexit, ramped up borrowing, cuts growth forecasts

LONDON : Britain ramped up its borrowing forecasts by much more than expected and said the vote to leave the European Union would weigh heavily on the economy, giving the government little room to ease the Brexit pressure on households and companies.

Finance minister Philip Hammond said on Wednesday that Brexit made it “more urgent than ever” to invest in tackling Britain’s long-term weaknesses, including one of the worst productivity growth rates among rich economies.

“Our task now is to prepare our economy to be resilient as we exit the EU and match-fit for the transition that will follow,” Hammond told parliament to cheers from lawmakers in his ruling Conservative party.

In an attempt to prepare Britain for leaving the EU, Hammond announced the launch of a fund to invest 23 billion pounds in rail, telecoms and housing infrastructure over the next five years.

But he and Prime Minister Theresa May have little room to raise public spending in a big way or cut taxes to help the world’s fifth-largest economy as it prepares to leave the EU.

Britain will need to borrow 122 billion pounds more over the next five years than it expected in March, before the Brexit vote, the country’s budget forecasters said in the first fiscal update since the that vote in June.

To cope with the higher borrowing, the debt office announced the biggest mid-year increase in government debt issuance since the financial crisis, pushing up yields on British gilts.

Britain’s economy has so far largely withstood the shock of the Brexit vote, wrong-footing the Bank of England and almost all private economists who expected a bigger immediate hit.

But PM May has said she will trigger the formal divorce talks by the end of March, ushering in years of uncertainty over the future shape of Britain’s relationship with the world’s biggest trading bloc.

The Office for Budget Responsibility, Britain’s independent budget forecasters, said gross domestic product would grow by 1.4 percent in 2017, down from an estimate of 2.2 percent made in March, before voters decided to leave the EU.

The OBR also saw economic growth in 2018 at 1.7 percent compared with March’s forecast of 2.1 percent.

Hammond said the OBR believed uncertainty about Britain’s trading relationships with its EU neighbors – who buy nearly half the country’s exports – will cut growth by 2.4 percentage points over coming years.

Brexit supporters, who say Britain’s economy is likely to fare much better than the widespread views of a slowdown, questioned the credibility of the latest OBR forecasts, especially the forecasts for 2017.

Hammond set himself an easier target for the budget deficit, saying he was targeting a shortfall of less than 2 percent of GDP by 2020, excluding cyclical swings in the economy.

Previously, the British government had targeted a surplus in the overall budget by the end of the decade.

But the overall message of his first budget statement since taking office in June was not significantly different from those of his predecessor George Osborne who spent six years bringing down the budget deficit.

“Rumors of the death of austerity (are) greatly exaggerated,” Osborne’s former top adviser Rupert Harrison said in a post on Twitter.

The government will invest 1.0-1.2 percent of GDP on economic infrastructure from 2020, up from 0.8 percent now, Hammond said.

To soften the hit to living standards for poorer households, the government will raise the minimum wage, partially reverse planned cuts in benefits for low-earners and curb fees on renting property.

It will also extend a freeze on the level of fuel duty.

Shares in leading estate agents tumbled after Britain said it would ban one-off tenant fees to try to bring down the cost of renting, the latest move to hit landlords.