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Janus Henderson: Santa Hammond throws caution to the wind

The Chancellor belied his reputation as a fiscal conservative by announcing a sizeable easing relative to previous plans, allocating the extra cash across a range of supposedly populist measures.

Fiscal policy will be 1.2% of GDP looser in the run-up to Brexit: cyclically-adjusted borrowing is now projected to fall by 0.8% of GDP between 2017-18 and 2019-20 versus 2.0% in the March 2017 Budget.

The Treasury made room for this policy shift by reducing headroom in previous plans, employing accounting tricks – most notably, tweaking housing association regulations to move borrowing off balance sheet – and pushing out the ultimate objective of a balanced budget.

The Chancellor still meets his “fiscal mandate” of a cyclically-adjusted deficit of below 2% of GDP in 2020-21 but the new projection of 1.3% is up from 0.9% in March, implying little protection against Brexit or other risks crystallising.

The OBR downgraded its medium-term growth forecast as expected but is arguably still giving the Chancellor too easy a ride. It continues to assume a smooth Brexit with no negative demand impact on GDP and also ignores the strong possibility that the global economy will enter another downturn by 2020, as suggested by cyclical analysis.

In cash terms, the Budget “gives away” £9.9 billion in 2019-20, with the distribution apparently governed by political expediency rather than economic logic – so £1.1 billion is spent on encouraging fuel and alcohol consumption by freezing duties and £600 million on a further boost to housing demand via stamp duty relief for first-time buyers. The NHS receives an extra £1.9 billion while an additional £1.5 billion is allocated to “preparing for EU Exit”. A modest £300 million is spent on changes to Universal Credit.

There was little for business to cheer: an earlier switch from RPI to CPI uprating for business rates is welcome but the cost will be recouped by ending capital gains indexation, while the housing supply package was underwhelming.

The Chancellor has delivered the Budget apparently demanded by the Prime Minister – one suspects that no. 10 will take any credit while he will suffer the consequences if it flops.

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