MNI ANALYSIS: UK Hammond Avoiding No-Deal Brexit Budget Spend

--Hammond Seeks Spending Delay Related To No Deal With Finances Under Pressure

By Kieran Williams and David Robinson

     LONDON (MNI) - UK Chancellor Philip Hammond is aiming to delay public

spending on preparations for a no-deal Brexit for as long as possible, which

will keep it out of the upcoming Budget's arithmetic.

     Hammond said on Wednesday in front of the Treasury Select Committee that

his article published earlier on Wednesday in The Times, which was portrayed as

him refusing to sanction spending on a Brexit no deal, had been misunderstood.

He said would not be allocating money in advance just to make a point.

     Critics have said the EU needed to be convinced the UK was prepared to go

for no deal but Hammond said "the EU knows that we mean business."

"Where it [spending] is uniquely required in a 'no deal' scenario we need to

work backwards from 30 March 2019 and identify where we need to make the

commitment decision in order to deliver on time, but not commit public funds on

a potentially abortive basis before we need to do so,"  Hammond said.

     The government's intention is to leave allocation of preparatory funds for

a Brexit 'no deal' as late a possible in order to not waste "precious public

money," in Hammond's words.

     Any commitments to spending would be factored into the fiscal arithmetic by

the Office for Budget Responsibility in the November 22 Budget, which would add

to the problems Hammond faces meeting his fiscal goals with the OBR having

already pre-announced a likely sizeable cut to its estimate of potential

productivity.

"The key issue is making sure that we are ready with a minimum effective

solution on day one after we leave the European Union," said Hammond, "but

making sure that we don't start committing substantial amount of funds any

earlier than we need to, in the hope that a 'no deal' scenario will be something

we don't have to plan for." 

     When pressed Hammond said that "any earlier we need to" meant there would

be a rolling programme and that some areas would need to start spending money in

the New Year to move towards a transitional agreement. Such spending, however,

could be met from contingency reserves, avoiding a hit to borrowing projections

Hammond repeatedly avoided questions around what he thought that the final

Brexit deal would look like, saying that the government needed to plan for a

wide range of scenarios.

     These included the possibility of a hostile 'no deal' scenario where

"people are not necessarily acting in their own self economic interest." 

     Hammond acknowledged that not everything would be in place for day one, at

end March 2019, but said that the government had made a commitment to operate

with the minimal economic infrastructure necessary.

     After Prime Minister Theresa May ran into criticism this week for refusing

to say whether she would vote to remain or leave the EU if the referendum was

held now, Hammond, who campaigned to remain, was wary when asked if the UK could

end up better-off outside the EU as a result of trade deals with non-EU

countries.

He said that the best case scenario would be a "patch" that afforded the UK the

same deals with non-EU countries that it has under the existing EU framework and

comprehensive deal could be negotiated in "the fullness of time." 

Hammond noted that lengthy supply chains and the ambiguous nature of future

cooperation between EU and UK customs authorities made it a difficult question

to answer, but said in the best case scenario, "many, most of the benefits of

being in the current customs union (would) still (be) available to our

businesses in a streamlined customs agreement." 

     In a final concession Hammond said "if you are asking me if I can see a

scenario of an agreement with the EU that so facilitates movement across the

border that the additional costs imposed are less than the benefits of being

able to negotiate trade agreements with third parties, yes I can."

In what seemed a bid to temper any perceived optimism, Hammond said that any

downside of trade frictions would be immediate, but any benefits would take time

to manifest and then further time would be required for UK businesses to take

advantage.

     The OBR, like the Bank of England, will model the impact of Brexit as a

negative. The assumption is that the UK moves, at least in the near-term, to a

less open trading environment.

     Small wonder given the challenges already facing the UK public finances,

with debt-to-GDP already just over 80%, that Hammond is keen not to add to

spending commitments.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

--MNI London Bureau; +44 203 865 3809; email: kieran.williams@marketnews.com

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