HM Treasury's Spending Increase will Support Growth in 2019 but Austerity to Weigh Thereafter 

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- HM Treasury unveils improved borrowing and debt-to-GDP forecasts.

- Plans to spend more, pledges larger increase if no deal Brexit avoided.

- But economists say austerity could return in 2020, weighing on economy.

The UK economy may be headed into uncertain waters as the country leaves the European Union but it's so-far demonstrated resilience in the face of a homemade political crisis, enabling HM Treasury to commit to a modest increase in public spending for the 2019 year on Wednesday. 

HM Treasury said Wednesday the government will provide increased funding for a range of public services and projects, after forecasts for tax receipts were upgraded and projections for borrowing in the years ahead were cut. 

Chancellor Philip Hammond says that if a so-called no deal Brexit is avoided, there'll be scope for more spending ahead. HM Treasury has long threatened to squeeze the economy and households with cuts to public spending if the UK leaves the EU and, more recently, if it leaves without a formal agreement.

Hammond says the national debt-to-GDP ratio is likely to fall in each of the next five years, even though the UK will continue to borrow large sums of money each year. Economic growth and less borrowing than was previously expected will drive the ratio lower, to 73% of GDP in 2024, down from 85.1% in 2017. 

"GDP growth for 2019 was revised down from 1.6% to 1.2%, but that was offset by upward revisions in later years that leave the average rate of growth almost unchanged. That’s a cyclical change rather than a structural one, as the slowdown in 2019 is assumed to be made up later. The real boost to the public finances comes from other economic assumptions, including upward revisions to forecasts for wage growth and the mix of employment growth," says Paul Dales, chief UK economist at Capital Economics.

The Office for Budget Responsibility (OBR) said after the announcement the government will have £26.6 bn of cash that it can use over the coming years without compromising its target to keep the "structural budget deficit" beneath 2% of GDP during that time. 

However, the publicly funded watchdog also said the government is unlikely to meet its target of balancing the books by the middle of the next decade, based on Wednesday's commitments and forecasts. The government has various measures of the budget deficit, with some being more flattering than others. 

"The Government’s stated ‘fiscal objective’ is to balance the budget by 2025-26 and past forecast performance suggests that it now has a 40 per cent chance of doing so by the end of our forecast in 2023-24. But in the years beyond the forecast the ageing population is likely to be putting increasing upward pressure on spending and the potential impact of different Brexit outcomes makes the medium-term outlook more than usually uncertain," the watchdog says.

Despite the good news on spending and debt, the forecast for GDP growth in 2019 has been slashed from 1.6% previously to just 1.2%. That downgrade comes amid a global economic slowdown and as the main parties in parliament face off with eachother and the electorate over the UK's exit from the EU.

The UK economy grew by 1.4% in 2018, down from 1.8% in 2017. It grew by 0.5% in January alone, which more than reverses the -0.4% decline seen back in December. However, the growth rate for the three months to the end of January was just 0.2%. 

"Beyond 2019/20, Mr. Hammond still plans to restart the fiscal squeeze; cyclically-adjusted borrowing is expected to fall to 0.8% of GDP in 2020/21, from 1.3% in 2019/20, thereby dampening the economy," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "But nearer the time, he likely will bow to pressure to ease up, given that the government has a wafer-thin majority and cyclically-adjusted borrowing is well below the Chancellor’s self-imposed limit of 2% of GDP in 2020/21." 

Tombs did also say, in a note to clients following the budget, that the current political climate means the Chancellor will likely find it increasingly difficult to justify fresh spending cuts over the coming years and so they are actually quite unlikely. Although if they do go ahead, they'd be sure to weigh on the economy.

Wednesday's budget comes just hours before the House of Commons votes on whether to have the Prime Minister pursue a so-called no deal Brexit where the UK exits the EU and defaults to doing business with it on World Trade Organization (WTO) terms.

Markets are focused increasingly on the rising and falling odds of a no deal Brexit happening because Prime Minister Theresa May's plan for exiting the EU has been rejected by parliament twice now, with a landslide coming out against the Withdrawal Agreement on both occasions. 

MPs will now be given the chance to accept or reject a so-called no deal Brexit before another ballot, on Thursday, gives them the opportunity to force the Prime Minister to return to Brussels and ask for an extension of the Article 50 window that is due to end on March 29. 

"If Parliament votes for a Brexit deal it will be rewarded with a “deal dividend” that can be spent on public services. If there’s no deal, then there’s nothing to spend. Of course, promises on future spending are only good if Mr Hammond is around to honour them. Given the current political instability, he may not be," says Dales.

The UK's parliament is overwhelmingly comprised of individuals who backed remaining in the European Union and who have, at best, given a tepid response to the electorate's decision to opt for an exit from the EU. 

The Prime Minister also voted and campaigned for remain ahead of the 2016 referendum and has, since Tuesday evening, said she will vote against a WTO terms trading relationship. Markets are anticipating that parliament will demand a delay to the UK's exit from the EU. 

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