'There's too much excitement' about the UK budget — maybe for no reason 

  • Analysts have told CNBC that the hype surrounding the next fiscal plan might be an overreaction.
  • At the moment, Brexit negotiators have not yet reached a deal over how the U.K. will leave the EU in March.
  • This does not allow the finance minister to have a clear economic picture of 2019 and the following years.

The U.K. government could announce as early as Monday extra spending plans — a hope that has raised interest in the government's last draft budget before Brexit kicks in.

Recent data from the Office for National Statistics has shown that in the first six months of the year, public sector borrowing stood at £19.9 billion – which was £10.7 billion lower than the previous fiscal year. This means that the U.K.'s finance chief, Philip Hammond, has more room to announce higher spending without having to raise taxes.

The budget plan, due on Monday, is set to mark what Prime Minister Theresa May described, earlier this month, as the end of austerity. However, analysts have told CNBC that the hype surrounding the next fiscal plan might be an overreaction.

"There's too much excitement, I think," Karen Ward, chief market strategist at J.P. Morgan asset management, told CNBC over the phone this week.

"The health of our finances depends on the Brexit deal," she said, adding that as a result next year's budget plan is likely to be more important, given that it will be clearer by then how the EU and the U.K. will work in the future.

At the moment, Brexit negotiators have not yet reached a deal over how the U.K. will leave the EU in March. This has raised chances that the U.K. will leave the EU abruptly in five months' time and, at the same time, it does not allow the finance minister to have a clear economic picture of 2019 and the following years.

"Soon after the (Brexit) deal has been struck, Mr Hammond will probably present another Budget," Brian Hilliard, chief U.K. economist at Societe Generale said in a client note on Wednesday on the assumption the U.K. and the EU will reach an agreement.

"This renders the October 29 Budget rather pointless. It will, however, allow the Chancellor to present a working definition of the end to austerity that Mrs May has promised," Hilliard added.

In the event of a no-deal, there could be changes to the fiscal plan too.

What could we expect?

The government is likely to support the national health system (NHS), to announce further funding for social housing and could also present changes to corporate tax, analysts have said.

"Mr Hammond won't need to find more savings to fund higher health spending. In June, the government announced that funding for the NHS would be £7 billion higher than planned in 2019/2010, building to £21 billion in 2022/23," Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics said in a note.

He added that the budget is likely to include a freeze in fuel duty in April, as the government has previously mentioned, as well as £0.2 billion per year for social housing.

Toby Ryland, a corporate tax partner at HW Fisher said in an email that Hammond "could take significant action" and reduce corporate tax.

"While corporation tax is due to fall to 17 percent by 2020. The Chancellor could reduce corporation tax further to as little as 12.5 percent, particularly if the chances of Britain crashing out of the European Union without a deal look greater than the chances of securing a deal," he said.

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All in all, Tombs added that the finance minister could use all of the headroom and step up spending, "but he likely wants to keep his powder dry in case of a no-deal Brexit."

How will markets react?

"Will markets care about this? Probably not. They are preoccupied with the Brexit fiasco," Hilliard from Societe Generale said.

Since the U.K.'s vote to leave the EU on June 23, 2016, Sterling has lost 13 percent of its value and has been volatile to noise surrounding the Brexit talks.

Ward from J.P. Morgan Asset Management also said that given the ongoing turmoil in global markets, investors are more likely to keep following the big picture rather than one single domestic event.

However, she added that if Hammond goes the extra mile in boosting public spending and given that the U.K. is at full employment, there could be some market moves assuming that the Bank of England would have to raise interest rates.

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