UK debt set to climb to levels not seen since 1964 following Brexit vote

UK economy will not deliver surplus in 2020: Hammond

The Brexit vote will reduce economic growth in the U.K. and see debt levels rise to new historic levels, according to official estimates by the Office for Budget Responsibility (OBR).

The new predictions on Wednesday came as Finance Minister Philip Hammond delivered the government's first budget announcement since the country voted to leave the European Union (EU).

Debt-to-GDP to rise

Richard Baker | in Pictures | Getty Images

The OBR assessment stated that the referendum result in June would reduce economic growth in the U.K. by 2.4 percentage points over the next five years. It also projected that the U.K.'s GDP (gross domestic product) would fall from 2.1 percent in 2016 to 1.4 percent next year.

"While the OBR is clear that it cannot predict the deal the U.K. will strike with the EU, its current view is that the referendum decision means that potential growth over the forecast period is 2.4 percentage points lower than would otherwise have been the case," Hammond said in parliament.

The OBR noted that the country would have to borrow an extra £122 billion ($151 billion) over the next five years, when compared to previous forecasts. George Osborne, Hammond's predecessor as finance minister, had been targeting a budget deficit surplus of £10.4 billion in the financial year of 2019/20, however, according to Britain's budget office, the U.K. is now forecast to run a deficit of £22 billion.

The organization - which is a non-departmental public body that gives estimates to the finance ministry - said that the government has opted "neither for a large near-term fiscal stimulus nor for more austerity over the medium term."

The report also highlighted that debt as a percentage of GDP would rise above 90 percent in 2017/2018 - levels not seen since 1964. Public debt levels in the U.K. were described by Hammond previously as, "eye-wateringly large" and they remain among the highest of the world's richest nations. Last year, the U.K.'s public debt was equivalent to 84 percent of GDP.

"As the OBR's debt projections demonstrate, we have more work to do to eliminate the deficit," Hammond added.

Preparing for Brexit

UK economy's resilience confounded commentators: Hammond

Hammond explained the government would focus on raising the minimum wage in the U.K., but the priority would be addressing Britain's public finances as the country prepares for its Brexit negotiations.

Sterling rose to a session high of around 1.243 against the dollar as Hammond spoke but quickly snapped back to nearly 1.236 after new economic data was released out of the U.S. The yield on the U.K.'s 10-year government bond rose to 1.451 percent during the announcement.

Government now needs to respond

UK finance minister committed to rebalancing economy post-Brexit: MP

Simon Kirby, economic secretary to the Treasury, told CNBC on Wednesday that the OBR's report had been very clear and that the government now needed to respond.

"We want an economy that works for everyone, an economy where businesses are confident that they can invest and great jobs… and I believe today that the chancellor has done exactly that," he said.

Kirby, who was part of the team that worked to prepare the budget with Philip Hammond, suggested that a deal which secured the best possible "divorce" for Britain and the EU would also transcend across the world.

"No-one said Brexit would be easy but what the Prime Minister has been very clear about is that we will get the very best possible deal for Britain and that best possible deal is the best possible deal also for Europe and the rest of the world," he added.

Market reaction

The market reaction appeared to be fairly subdued with the main surprise from Hammond's budget speech coming from the announcement that the Autumn Statement is to be abolished.

Paul Hollingsworth, UK economist at Capital Economics, argued that in perspective, it is the perceived inaction regarding austerity that is worth noting.

He said in a note, "The big picture, though, is that while the Chancellor put an end to Autumn Statements, he did not put an end to austerity. With a goal of achieving a budget balance in the next parliament, austerity is just set to continue for even longer. But a more gradual path of belt-tightening should help the economy to remain resilient."

Ben Brettell, senior economist with Hargreaves Lansdown, believed that Hammond's speech in parliament was remarkably similar in strategy to that of his predecessor.

He said in a note, "We might have a new chancellor but Philip Hammond's speech today came straight out of the George Osborne playbook.

"(Hammond's) focus on productivity was welcome, and long overdue. The UK has fallen behind in productivity for too long, though it should be noted that promising to tackle the problem is much easier than finding a solution," he added.

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