UK Budget update today

UK Chancellor of the Exchequer Philip Hammond will give his Spring Budget update today. Traditionally a major set-piece event, its importance has now been downgraded. The main Budget statement now takes place in the autumn and it has been promised that this afternoon’s speech will not contain any major changes to tax or spending. Instead, it is scheduled to be merely a brief review of the current state of the public finances and the outlook for the budget deficit.

However, Chancellor Hammond should be able to deliver some good news on the near-term fiscal picture. In the first ten months of the current fiscal year, the UK budget deficit has come in well below projections. This primarily reflects higher-than-expected tax receipts. Some of this may be one-off effects, but it will still translate into a much lower budget deficit for this year than seemed likely last autumn. We also suspect that the Office for Budget Responsibility (OBR) will revise up at least modestly its forecasts for GDP growth in both this year and next, although its projections further out may be little changed.

Taken together, the lower starting point and growth upgrades seem set to significantly reduce the OBR’s borrowing projections for the next five years. That will mean that the Chancellor can more easily meet his key fiscal rule that the structural – i.e. cyclically adjusted – the deficit is below 2% of GDP by 2020/21 with some room to spare. That will give him headroom for some giveaways, which will likely lead to pressure to ease up on ‘austerity’. The signs are that he will resist that temptation for now, but this autumn’s budget may see a more significant loosening of the purse strings.

In the US, today’s February CPI release will be watched closely. Inflationary pressures seem to be gradually increasing. The ‘headline’ inflation measure rose by 0.5% in January. This was primarily due to a higher oil price, though core inflation also moved up by 0.3%, its fastest monthly rise for more than six years. We expect monthly headline inflation to have slowed in February but the forecast rise should still be enough to push the annual rate up to 2.2%. Meanwhile, ‘core’ inflation is forecast to edge up to 1.9% from 1.8%.

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