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Why this week is crucial for post-Brexit Britain

British Chancellor of the Exchequer Philip Hammond arrives for the weekly cabinet meeting at 10 Downing Street in London.
Justin Tallis | AFP | Getty Images
British Chancellor of the Exchequer Philip Hammond arrives for the weekly cabinet meeting at 10 Downing Street in London.

The U.K.'s Chancellor Philip Hammond will be in the spotlight Wednesday when he presents the government's first "Autumn Statement" on the state of the economy after the Brexit vote. Analysts will be poring over Hammond's speech for clarity on what the government's economic plans are after the decision to leave the EU.

"It's normally an important fiscal event…But this year it's even more significant because of the uncertainties surrounding the (Brexit) referendum," Philip Shaw, chief economist at Investec told CNBC over the phone.

It is also the first Autumn Statement delivered by Phillip Hammond, who replaced George Osborne as Chancellor in July, who has said there would be a "fiscal reset," Shaw noted.

Last June, when British voters decided to give up on its membership of the European Union, analysts foresaw an economic contraction for Britain, both in the short- and medium-term. However, the economy has proven more resilient than originally expected, growing 0.7 percent and 0.5 percent in the second and third quarters of this year respectively.

"Absent a sharp slowdown, we are sceptical about the case for a short-term fiscal boost, particularly with a starting point where the economy is at full employment. But we see better case for more sustained support to offset the Brexit drag," Morgan Stanley said in a research note last week.

CNBC takes a look at some of the issues surrounding the Autumn Statement.


What could we expect?

"We will not see a major fiscal stimulus, it will be moderate," Kallum Pickering, U.K. economist at Berenberg told CNBC over the phone.

There would be "modest cuts and modest infrastructure investment," he added.

According to Morgan Stanley, the government could announce as much as £80 billion ($98.7 billion) to boost public finances, with an additional £4 billion per annum in additional stimulus. Government borrowing should go up by £98 billion.

"We expect the Autumn Statement to focus on infrastructure investment, although Chancellor has indicated a number of times that he will be keeping a close eye on fiscal prudence," PwC said in a note.


What kind of investment could we expect?

An airliner comes in to land at Heathrow Airport, London.
Getty Images
An airliner comes in to land at Heathrow Airport, London.

Chancellor Hammond's strategy should include support for infrastructure investments, including road and railway projects. Essentially, Hammond will look for "small schemes," which are "easier to implement and bring benefits, which can be felt by people sooner cross the whole country," Neil Broadhead, head of UK capital projects and infrastructure at PwC, said.

However, Number 10 has already mentioned some bigger investment projects on the pipeline. It approved a £18 billion investment in a nuclear power station, announced support for a third runway at Heathrow Airport and given the go-ahead for the world's largest wind farm.


Corporate and sales tax, housing sector

Graeme Robertson | Getty Images

After the Brexit vote, analysts started questioning whether Number 10 would try to attract businesses by lowering its corporate tax rate. According to the Financial Times, Hammond told ministers in Brussels that he would not pursue a pledge by his predecessor to bring down corporate tax to 15 percent.

"The rate's unlikely to be cut below the 17 percent target set out. While going further would send a signal to the outside world that the U.K. is well and truly open for business, it would not play well with the public," Mike Cooper, tax partner at PwC said in a note.

Most analysts do not foresee any changes to value-added tax. Morgan Stanley said reducing VAT would be an "expensive" measure and there is no need for an "emergency fiscal support" measure given that the economy isn't contracting.

According to Pickering, Hammond could announce updates to the income tax thresholds and support real disposable income to offset higher inflation.

Housing is another key issue and one of the areas that Hammond has promised to improve. Earlier last month, he unveiled a £5 billion stimulus to support the construction of thousands of new homes. "If it was an easy problem, we'd have solved it by now," Shaw from Investec told CNBC, adding that Hammond could go further in the Autumn Statement and present changes to planning regulations.


Where could Hammond surprise?

According to Shaw, from Investec, Chancellor Hammond could surprise on the value of the infrastructure investment.

But Pickering suggested that Hammond could surprise with potential cuts to capital gains and corporate taxes, but it will mostly be "more of the same" with "small changes to spending and tax cuts."‎

Whichever direction Hammond takes, he will be constrained by the high level of public deficit. Despite the chancellor's support for what he describes as "modest, rapidly deliverable investments," he also aims to lead Britain on a path to a fiscal surplus.


How markets will react?

"Markets will be underwhelmed by the Autumn Statement," Pickering from Berenberg told CNBC.

"It would be good for markets if Hammond would present specific short and medium term measures to offset he shocks of Brexit," Pickering added, suggesting that the likelihood of this happening is small.


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