UK budget likely to prepare state finances for Brexit shock

Britain's Treasury chief is likely to ignore demands that the government ease seven years of austerity when he unveils the budget Wednesday, opting instead to keep a tight rein on spending as economic growth slows and the country prepares for the impact of Brexit.

Philip Hammond is under pressure to show the country's finances are strong as Britain braces for the shock of leaving the European Union. That leaves him little room for spending increases, even after a year in which the heroism of police and firefighters fueled calls to end the public sector pay cap, teachers marched to demand increased school funding and the National Health Service struggled to treat rising numbers of patients.

"Given the major uncertainties facing the economy centered on Brexit, Mr. Hammond is reportedly concerned that investor confidence in the U.K. could be seriously damaged if he abandons the fiscal framework adopted only a year ago," said Howard Archer, chief economic adviser for the EY Item Club.

A year ago, Prime Minister Theresa May's Conservative-led government was touting the fact that Britain had one of the fastest-growing economies in the developed world. But now the economy is slowing, partly as a result of uncertainty linked to Brexit, and that is undermining the growth many hoped would spur tax revenue and fund increased spending.

Britain's economy grew at an annual rate of 1.5 percent in the third quarter, compared with the eurozone's 2.5 percent.

The gloomy outlook comes as public finances are weakening. Public borrowing jumped to 8 billion pounds in October, above predictions of 7.5 billion, driven by higher borrowing costs. Borrowing is at a similar level to that before the 2007-2008 financial crisis, the House of Commons said in a statement released ahead of the budget.

Public sector net debt now totals 87.2 percent of gross domestic product, compared with less than 40 percent in 2007, the Office for National Statistics said Tuesday.

At the same time, the Office of Budget Responsibility has warned that it will cut its forecast for productivity over the next five years. That is expected to mean lower tax revenues and make it harder for Hammond to ease austerity and boost public sector pay.

A flurry of relatively inexpensive initiatives is likely to attempt to deflect media attention from the somber news. Hammond will promise to spur technological innovation by funding artificial intelligence research, electric car charging points and digital skills.

Britain's ongoing housing shortage is also likely to figure large, said Kallum Pickering, senior U.K. Economist at Berenberg.

"The housing market is the Achilles' heel of the U.K. economy. The decades-long deficit in annual house building has contributed significantly to the rise in household debt and wealth inequality," he said, adding that the problem isn't simple to fix. "We are pessimistic about his chances of providing a long-term solution in light of the political challenges facing the sector."