×

UPDATE 5-UK sees weak growth, more borrowing, but Hammond says will spend

* UK GDP growth cut for every year up to early 2020s

* Deficit forecasts cut in short term, wider later on

* Under-fire Hammond to spend on housing, health, Brexit

* Sterling falls before picking up (Adds comments from OBR, details, background)

LONDON, Nov 22 (Reuters) - Britain slashed its economic growth forecasts and expects to borrow a lot more going into the next decade, finance minister Philip Hammond said, but he nonetheless plans to spend more in the next couple of years to offset the impact of Brexit.

Hammond was under heavy pressure to use his budget statement on Wednesday to turn around the fortunes of Prime Minister Theresa May. Some lawmakers had even called on May to fire him for his cautious approach to Brexit and to the public finances.

But Hammond looked relaxed and cracked jokes as he said he would help voters by abolishing a duty for first-time buyers on the purchases of homes worth up to 300,000 pounds ($397,500), keep a freeze on fuel duty and spend more on the health service.

He also committed 44 billion pounds to provide funding, loans and guarantees over five years in a bid to deliver 300,000 net additional homes per year on average by the mid-2020s, addressing Britain's acute housing shortage.

In a rebuff to his Brexit critics, he earmarked an extra 3 billion pounds to ready Britain for leaving the European Union.

Hammond also stuck to the Conservatives' main objective since they won power in 2010 under David Cameron as he promised to keep his focus on fixing the public finances.

"We took over an economy with the highest budget deficit in our peacetime history," he told parliament.

"Since then, thanks to the hard work of the British people, that deficit has been shrinking and next year will be below 2 percent. But our debt is still too high," he said.

However, Britain's official budget watchdog said the spending plans for the next two years were a "significant giveaway" as Hammond sought to cushion the Brexit slowdown.

Britain now looks on course to borrow 29.1 billion pounds more by the end of the 2021/22 tax year than the official budget forecaster had expected eight months ago.

"The chancellor has been bolder than widely expected and has bowed to pressure to ease the near-term pace of the fiscal consolidation," Samuel Tombs, an economist with Pantheon Macroeconomics, said.

Sterling initially fell as Hammond announced the gloomy forecasts for Britain's Brexit-bound economy - which contrast with stronger growth in many other rich nations - but rose later to hit a three-week high against the U.S. dollar.

At a time when inflation has risen sharply and wages have grown only slowly, many voters are increasingly angry about years of spending cuts in many areas of public services, something Hammond acknowledged in his speech.

"We understand the frustration of families where real incomes are under pressure," he said.

The government will reduce the delays in receiving benefit payments that many families have suffered under changes to the welfare system, Hammond said.

He also sought to help businesses by slowing the rise in the so-called business rates tax on the premises they occupy, and he raised a tax credit for research and development.

But the limitations on Hammond were clear as he said the war chest he wants to keep in reserve to help the economy had almost halved in size to 14.8 billion pounds.

SLOWDOWN AHEAD

Britain's budget forecasters now expect gross domestic product will grow by 1.5 percent in 2017, compared with a forecast of 2.0 percent made in March, reflecting a slowdown this year as the Brexit vote weighed.

The Office for Budget Responsibility saw growth in 2018 at 1.4 percent, down from its previous forecast of 1.6 percent.

Its revisions for later years were more acute: GDP growth forecasts in 2019 and 2020 stood at 1.3 percent in both years, down from 1.7 and 1.9 percent respectively seen in March.

"There is a recognition from the OBR that the growth outlook is dire at a time when the world economy is enjoying a synchronized upswing. Germany is enjoying a boom and even Italy is growing faster than the UK," Daiwa Capital Markets Europe's Chris Scicluna said.

The OBR's gloomier view on growth was based largely on a cut to its projections for productivity, the Achilles heel of Britain's economy especially since the global financial crisis.

"The persistence of weak productivity growth does not bode well for the UKs growth potential in the years ahead," it said.

By 2021 and 2022, economic growth was seen picking up only slightly to 1.5 and 1.6 percent respectively.

As well lower tax revenues, slower growth will add to the challenge of turning Britain's budget deficit into a surplus by the mid-2020s.

Hammond said the OBR now expected Britain would borrow less this year and in the 2018/19 fiscal year but more in the following years as the slowdown in the economy bites.

Britain is expected to run a budget deficit of 1.3 percent of GDP by the 2021/22 financial year, almost double the previous estimate of 0.7 percent.

Before last year's Brexit vote, Britain had been aiming to post a budget surplus by the end of this decade, itself a delay from an original target of fixing the public finances by 2015.

There was some better news for the public finances - Britain's debt was expected to peak at 86.4 percent of GDP this year - about double its level before the global financial crisis - before falling in the coming years.

But the OBR budget forecasters said the fall in net debt was largely achieved by the sales of shares in state-run bank RBS and by an accounting switch to get the debt of housing associations off the government's books. ($1 = 0.7547 pounds)

(Additional reporting by UK bureau; Writing by William Schomberg; Editing by Hugh Lawson)