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UK's embattled government set for budget update — here's all you need to know

  • Finance Minister Philip Hammond will reveal the U.K. government's official Autumn Budget, at a time when he's under pressure from all sides
  • In an interview over the weekend, Hammond pledged to build 300,000 new homes per year and address inefficiencies in the property market
  • Hammond is also under pressure to remove the public sector cap of 1 percent
Philip Hammond, U.K. chancellor of the exchequer.
Christopher Furlong | Gety Images News | Getty Images
Philip Hammond, U.K. chancellor of the exchequer.

A new financial plan for the U.K. is due Wednesday, with the announcement seen as a proxy vote on Theresa May's leadership and pivotal for the embattled Conservative party.

Finance Minister Philip Hammond will reveal the U.K. government's official Autumn Budget, at a time when he's under pressure from all sides. Euroskeptics have criticized him for failing to be supportive of Brexit, while many are urging the government to ease up on austerity and deliver a "big and bold" budget to generate support for an embattled government.

Here, CNBC highlights what to look out for on Wednesday.

End to austerity drive?

Hammond has pledged to achieve a budget deficit of less than 2 percent of gross domestic product (GDP), from 2.6 percent for 2016/17, by 2020 with the goal of eliminating the deficit by the mid 2020s. However, the government could look to adopt a less hawkish tone in light of Brexit developments and austerity fatigue from voters.

A public spending splurge may also spark the attention of rating agencies. Moody's downgraded the U.K. rating to "Aa2" on September 22, citing concerns about growth and the state of public finances.

Hammond has the delicate task of addressing the concerns of those inflicted by cuts to public services and to welfare in the last few years, but at the same time he has to maintain credibility in fiscal targets over the horizon period.

Housing

In an interview over the weekend, Hammond pledged to build 300,000 new homes per year and address inefficiencies in the property market. (This is about 100,000 more than the run rate for the last few years). House affordability has been a big topic of debate on both sides of the political spectrum and Prime Minister Theresa May wanted to make it front and center of this budget given that youth home ownership has been on the decline since the Conservatives came into government.

According to an interview in the Sunday Times newspaper over the weekend, the finance minister will look to introduce measures to do "whatever it takes" to get builders building and will look to find £5 billion ($6.6 billion) for housing schemes. Other measures that have been discussed are the elimination of a house purchase levy for first time buyers on a temporary basis and banning letting fees for tenants.

Public sector pay

Hammond is also under pressure to remove the public sector cap of 1 percent. With inflation well above that level, both public and private sectors have been hit by a drop in living standards. The finance minister has already bowed to pressure and given the police force and prison officers a 1 percent wage rise and bonus for 2017/2018. However, the Institute for Fiscal Studies (IFS) has estimated that abolishing the cap altogether and raising wages in line with inflation would cost the Treasury up to £4 billion a year. This makes a comprehensive overhaul less likely.

Government borrowing

Public sector net borrowing (PSNB) — one metric used to show the fundamental health of the British economy — for 2017/2018 is on track to undershoot the £58.3 billion penciled in for the year by about £7 billion. However, long-term borrowing will be determined by the OBR's (Office for Budget Responsibility) forecasts for growth and productivity.

Citi analysts have estimated that if the OBR was to downgrade U.K. growth in line with Bank of England forecasts (1.7 percent for 2020, versus 1.9 percent) and downgrade productivity forecasts from 1.8 percent over the horizon period to 1 percent, that could lead to extra borrowing of around £30 billion over the period with most of the impact being felt further out.

Focus on technology developments

Hammond is expected to use the budget to spell out how the U.K. will become a leader in the technology revolution. Among measures expected to be announced are £75 million towards artificial intelligence (AI), reforms to allow driverless cars on the roads by 2021, £400 million for electric charge points and £160 million for next-generation 5G across mobile networks.

A nod to the youth

At the Conservative Party conference, May pledged to keep university tuition fees frozen until 2019. The party has also raised the threshold at which students pay back loans. Hammond is expected to announce that a review of student finances is underway. Introducing an age-dependent income tax allowance for those under 30 is one option that has also been discussed.

Much is at stake

Hammond faced a humiliating blow following the U.K.'s Spring Budget and had to u-turn on his proposal to raise taxes for the self-employed after backlash from within his own party. This budget will be even more closely scrutinized as it is the first budget since the election — one that even Hammond's own career may be attached to. Any budget measure could be shot down if fewer than 10 Conservative members side with the Labour party. Much is at stake.