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Hammond readies budget booster for UK economy, shock therapy unlikely

By Andy Bruce

By Andy Bruce

LONDON (Reuters) - British finance minister Philip Hammond looks unlikely to spend big when he announces the country's first budget plan since the Brexit vote on Wednesday, but he will probably take steps to help business and consumers through a slowdown next year.

The independent Office for Budget Responsibility looks set to paint a much worse picture for the economy between now and the end of the decade as it leaves the European Union.

So far, the impact of June's Brexit vote has been less severe than most economists expected, allowing Hammond to wait until a full budget statement due in March before deciding if he needs to give the economy a big boost.


Economists polled by Reuters say Hammond will limit himself to announcing some modest infrastructure spending and more housing stimulus in the Autumn Statement, a half-yearly update on the budget.

He said on Sunday he wanted to keep some fiscal "headroom" for the economic uncertainty Britain is likely to face during its divorce proceedings with the EU in the next couple of years.

Hammond could put his stamp on his tenure as finance minister, starting with an overhaul of the fiscal rules of his predecessor, George Osborne.

Below are measures that Hammond might announce on Wednesday:


Hammond has ruled out a splurge in government spending, describing Britain's debt levels as "eye-wateringly high". But he has said he will slow the drive to cut the budget deficit which is still one of the largest among rich countries.

Progress on cutting the deficit has been slow this year and the outlook for the economy is weak, so the OBR is likely to raise its government borrowing estimates sharply even before any plans for more government spending.

Public borrowing could overshoot by 100 billion pounds cumulatively over the next five years compared with the OBR's forecast before the vote, according to accountancy firm PwC.

Most analysts expect the government will finance additional borrowing by issuing more short-term Treasury bills, rather than add to its stock of government bonds.


Hammond backs a targeted approach to investment and has suggested that, for now, he favors small infrastructure projects over bigger projects such as new high-speed railway lines or power stations, which require more time to start.

Economists think any extra spending on infrastructure will amount to much less than 1 percentage point of gross domestic product, perhaps funded by new infrastructure bonds - although some are skeptical about their merits.

"Why not just finance the spending directly through the issuance of gilts? That would certainly be the cheapest method," said Societe Generale economist Brian Hilliard.


Housing remains one of Britain's biggest economic problems. Building of affordable housing fell by more than half in the 2015/16 financial year compared with the year before.

Last month, Hammond launched a 5 billion pound ($6.2 billion) homebuilding stimulus package, comprising schemes to free up surplus public land and guarantee housing developments.

He might take the opportunity on Wednesday to relax planning regulations to make it easier to build new homes, or encourage landowners to use their land for housing construction.

The Bank of England this month revised away a forecast for a 4 percent fall in housing investment in 2017. "This might be consistent with a public housing investment program or some support to housebuilders," HSBC economist Elizabeth Martins said. She also highlighted the possibility of a "buy as you go" scheme for people renting houses.


Hammond is under pressure to help Britons whose incomes are likely to be squeezed by a sharp increase in inflation next year, spurred by the pound's plunge since June's Brexit vote, and only slow wage growth.

Prime Minister Theresa May has pledged to serve "just managing" families, responding to discontent with the political establishment and income disparity exposed by the Brexit vote.

"Given this squeeze, the chancellor may use the Autumn Statement to defer some of the planned welfare cuts," Andrew Goodwin, lead economist at Oxford Economics, said.

Osborne tried to help households by raising the threshold at which workers start to pay income tax and raising the minimum wage. Hammond may choose to accelerate this process.

The Resolution Foundation, a think tank, has called for a more targeted approach by reversing cuts to social security benefits for people who are in work but on low wages.

To help pay for measures for struggling families, Hammond could curb tax breaks that encourage company employees to join gyms and undergo health checks, the Sunday Telegraph reported.


Hammond is unlikely to resort to the costly option of cutting sales taxes on Wednesday, given that the economy has so far held up after the Brexit vote.

Two newspapers said on Sunday Hammond might keep the possibility of a temporary cut to value-added tax for his full budget statement in March.

The finance minister is likely to press ahead with plans to cut the rate of corporate tax to 17 percent in the coming years from 20 percent at the moment, after ditching his predecessor's plans for a cut to just 15 percent.

Employers groups have urged Hammond to raise incentives for business investment, for instance by boosting tax credits for research and development spending.

On Monday, Prime Minister Theresa May unveiled a new industrial strategy, pledging to spend billions of pounds on science, technology and research to spur a new "ambitious" way of doing business in Britain.

($1 = 0.8121 pounds)

(Writing by Andy Bruce; Editing by William Schomberg and Catherine Evans)