Five Things to for Watch in U.K. Budget

By Jason Douglas Features Dow Jones Newswires

GROWTH

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The U.K. economy has slowed this year and is predicted to grow only modestly in 2018 by the European Commission, the International Monetary Fund and others. Chancellor of the Exchequer Philip Hammond will present the latest forecasts for the economy from the Office for Budget Responsibility, the U.K.'s fiscal watchdog, which are expected to point to a similarly muted outlook against a backdrop of subdued investment and meager wage growth.

PRODUCTIVITY

A key assumption underpinning the OBR's past forecasts has been that Britain's woeful productivity growth will begin to recover. Yet in its latest evaluation of its forecasts, the OBR warned that it intends to lower its expectations for productivity growth significantly following repeated disappointments. That will have a knock-on effect on its forecasts for economic growth, wages and the public finances.

TAX AND SPENDING

The weaker outlook for the economy means Mr. Hammond will likely have to grapple with a gloomier prognosis for the public finances. Economists say any revisions are unlikely to be so severe that they will threaten his goal of bringing the budget deficit under 2% of national income by 2021, but they will probably eat away at how much room he has to finance extra spending or cut taxes. Mr. Hammond has also signaled he would like to keep some fiscal firepower in reserve to cushion the economy against any unexpected shocks.

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BREXIT

Mr. Hammond has talked up the need to make the economy fit for its future outside the European Union. The U.K. is scheduled to leave the EU in 2019. The OBR and the Bank of England have warned that reshaping the U.K.'s commercial ties will likely weigh on productivity growth in the years ahead, as businesses shift their focus to new markets and immigration declines. In an effort to offset this drag, Mr. Hammond has talked up the need for infrastructure improvements and has already pledged cash for high-tech projects such as artificial intelligence research.

POLITICS

Mr. Hammond's last budget in March quickly unraveled, after a flagship proposal to bring taxes on the self-employed closer to those levied on employees hit a wall of criticism from his own lawmakers. Some pointed out it breached a manifesto commitment made in 2015. The reversal was an embarrassment that Mr. Hammond will be anxious not to repeat.

Write to Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

November 22, 2017 02:14 ET (07:14 GMT)