Is the ‘deal dividend’ still on the table?

Amid all the Brexit ‘noise’, it’s hard to believe our MPs have time for anything else.

But UK government business must continue regardless.

Apart from the – much more entertaining – Cheltenham Festival, the middle of March always used to feature the country’s annual Budget.

It was always a tough choice about which to watch (not!). These days, though, the real Budget takes place around the end of October. And this week’s announcement by the Chancellor has now been downgraded to a ‘Spring Statement’ sideshow.

So it’s off to the Cotswolds for some top-quality National Hunt racing? Sadly, some of us have to stay here and analyse the Spring Statement – and its ‘deal dividend’…

Excuses, excuses

Government ministers like to make big assumptions and sweeping statements. But they’re also keen on ‘get-out’ clauses.

In other words, if their predictions prove to be wide of the mark, they like to have a scapegoat to castigate.

With his Spring Statement, Philip Hammond is perfectly positioned on that score.

If everything goes seriously pear-shaped, he can always blame Brexit as an excuse and the “cloud of uncertainty” that it’s created.

What’s more, if all the forecasts turn out wrong, he can also blame the Office of Budget Responsibility for fouling them up. Which is nice and easy: the OBR doesn’t, ahem, exactly have the best crystal ball around.

But ‘Speadsheet Phil’ is nothing if not a politician. He’s quite attuned to claiming credit for the current healthy condition of the state’s finances.

Yes, in case you thought you’d misread that, I’ll repeat it.

UK plc’s balance sheet is in very good nick – certainly when compared to many other countries, anyway.

Admittedly, our economic growth isn’t too thrilling. The latest figures from January indicate that Britain’s GDP expanded by just 0.2% on a quarterly basis.

Fretting over Brexit has been cited as a serious growth depressant. At first glance, then, this wouldn’t suggest that Her Majesty’s Revenue & Customs is coining it on the tax collection front.

Yet HMRC is now raking in the cash. This stems from a year or more ago when the economy’s headline numbers were rather stronger.

Granted, the government is still spending more money than it’s recouping in tax. But according to the Chancellor’s favoured borrowing measure, the current – and future – situation is looking considerably better than previously expected.

Jargon alert: the fiscal rule we’re talking about here is the cyclically-adjusted budget deficit, which gauges the shortfall of tax versus spending depending on the position of the economic cycle.

At the time of last October’s Budget, keeping the cyclically-adjusted deficit below 2% of GDP by 2020/21 meant that Mr Hammond had headroom of £15.4bn. Put another way, this was the extra amount of public money he could spend without breaking his own rules.

War chest

Now that headroom element has risen to £26.6bn. That leaves the Chancellor with reserve funds worth more than 1% of GDP that could be spent at some stage – to repeat, without splashing out more than he’s earlier promised.

This is partly due to OBR projections that GDP growth will be more ‘tax-rich’. “The OBR revised up its forecasts for wage growth in each year and is expecting a more favourable composition of employment tilted towards high-income earners”, says Capital Economics. “Taken together with the lower starting point for public borrowing in 2018/19 of £22bn versus £25bn, forecasts for borrowing were lowered by a cumulative £27bn”.

Sure, let’s not get bogged down with the exact numbers in two years’ time. As I’ve already noted, any future estimates – in particular those produced by the OBR – could prove to be wide of the mark.

The message is clear, though. Britain has a sizeable war chest that can be deployed to bolster the economy if things are looking tough post-Brexit.

Political problems

Here’s where we switch from economic and financial matters to political problems.

Mr Hammond was talking about a ‘deal dividend’ that would be spent when… you’ve guessed it… a Brexit deal was agreed in the House of Commons.

Trouble is, our noble parliamentarians haven’t managed to agree on very much at all so far (I’m disregarding Wednesday’s ‘no-deal’ rejection as it’s not worth a lot).

If there’s no Brexit deal by 29 March, the Chancellor insinuated that this deal dividend will disappear and that he won’t be able to sanction enough extra public spending to cushion the possible economic effects.

Earlier this week my colleague Sean Keyes did some excellent analysis on the Brexit alternatives so I won’t go over that ground again today.

Suffice to say, though, I believe Mr Hammond is bluffing about not paying the deal dividend if the country ends up without a divorce deal.

While I wouldn’t anticipate the disruption resulting from the latter to be either as bad or as lengthy as the gloomsters are suggesting, I’d still expect the Chancellor to initiate a significant increase in public spending to help restore economic confidence.

We now know he could afford to do so.

And if an exit agreement, even if delayed, does get done – this remains the most likely outcome – Mr Hammond’s deal dividend will be spent anyway.

Add in a further potential boost from the private sector with business investment poised to recover when Brexit has been resolved, and the outlook for both the UK economy and the FTSE 100 could actually be quite bright.

Hang on… I’m normally bearish. And here I am sounding relatively optimistic! Maybe it’s time for me to stop writing and ask how readers see events playing out.

So what do you think about it all? We’d love to hear your views on the whole Brexit brouhaha – please email us on [email protected]

1 Comment
  1. Chi Dengel 3 years ago

    Hey, Thank you for taking the time to write this. I have to start blogging again soon ugh.

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