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RANsquawk Preview: UK Budget due 22nd November at 1230GMT/0630CST

  • UK Chancellor Hammond not expected to announce a wave of ‘give-aways’ due to future post-Brexit uncertainty
  • OBR expected to downgrade productivity and growth projections, upgrade inflation projections
  • Gilt issuance is anticipated to fall to GBP 113.4bln (as surveyed by Reuters) against the DMO’s April projection of GBP 114.2bln

BACKGROUND

At the previous budget, UK Chancellor Hammond announced his plan to cut public borrowing from GBP 58.3bln in 2017 to GBP 16.8bln in 2021-22; a decision which was taken with the aim of creating GBP 26bln ‘headroom’ in order to protect the UK economy from any Brexit-related adverse shocks. With this in mind, the Chancellor has little scope to unveil much in the way of give-aways, given that he has already announced a) the pre-committed GBP 1bln confidence and supply deal with the DPU, b) GBP 2.3bln tuition fee freeze and c) GBP 600mln national insurance u-turn from the previous budget.

UK ECONOMY

In terms of financing requirements, the Chancellor may be afforded some reprieve by higher tax revenues in the first half of the year; which have exceeded the OBR’s forecasts from the March budget. Lloyds believe that this has led to GBP 6bln less of public borrowing than initially imagined, with the FT suggesting it could be as much as GBP 7-8bln less. However, Lloyds suggest that an artificial boost to dividend tax receipts in January 2017 which is unlikely to be repeated next year could hamper public finances for the remainder of the year. Nonetheless, the broader improvement in public finances could lead to a downward revision for overall borrowing this fiscal year but any revisions are likely to be limited given the need for caution as the UK navigates its exit from the EU.

DMO issuance expectations for FY 2017/18:

Gilts consensus (Reuters): GBP 113.4bln (High GBP 114.2bln, Low GBP 107.0bln) vs. April DMO projection GBP 114.bln.

Lloyds: GBP 110bln

Barclays: GBP 114.2bln

HSBC: GBP 107bln

SocGen: GBP 100bln

T-Bill consensus: GBP -13.85bln (High GBP -9.5bln, Low GBP -19.5bln) vs. April DMO projection GBP -9.5bln.

However, the latest economic forecasts from the OBR could have some bearing on the above. The OBR is widely expected to downgrade its forecasts for productivity. Previous productivity assumptions ran at a rate of 1.6% annually between 2016/2017 and 2021/2022; Barclays highlight that the IFS suggest that a productivity rate of 1% would lead to increased borrowing over the forecast horizon of GBP 80bln while a 0.4% rate would increase borrowing by GBP 165bln and as such could be another factor for consideration when assessing the public sector borrowing requirements. Given the above likelihood of productivity downgrades, HSBC are looking for the OBR to cut its GDP estimates on average by 0.2pp per annum tspanoughout the forecast horizon with inflation estimates expected to be lifted given that CPI (Y/Y 3.0%) is currently running above the OBR’s peak expectations of 2.7% (Please see below for a full breakdown of HSBC’s forecasts). All of the above could have some bearing on the argument laid out in the first paragraph of this section for lower borrowing requirements; HSBC expects all of the above to balance out at a GBP 7bln loosening next year.

HSBC OBR ForecastsIn terms of other economic factors to be aware of, Barclays highlight that we usually see the Chancellor confirm the inflation target underlying the assumptions made in the budget. Barclays note that the ONS have moved their headline inflation measure from CPI to CPIH which could lead to a redefining of the BoE’s inflation target but there has been little in the way of concrete reports on this front.

EQUITY SPECIFIC ANNOUNCEMENTS

A bulk of the price action alongside the budget is often seen in equity specific moves. In terms of sectors to watch, UK homebuilders/estate agents will naturally be in focus with weekend press reports suggesting the budget will unveil plans to build another 300,000 UK homes, whilst Oxford Economics note that ‘a cut in stamp duty on house purchases for first-time buyers has also been mooted’. As such, it is worth watching the likes of Berkeley Group, Taylor Wimpey, Redrow, Crest Nicholson, Barratt Developments, Persimmon, Foxtons, Purple Bricks and Savills.

Elsewhere, Barclays suggests that other measures could include a potential freezing of fuel duties for the 7th consecutive year and higher taxes on new diesel cars.

For UK insurers, the domestic press has placed some focus on the possibility of the Chancellor imposing an additional hike in the tax on insurance policies.

Alcohol duties are likely to track inflation, while tobacco duty is likely to continue to rise at a rate of 2% above UK inflation.

As ever, watch utility names such as SSE, Centrica, EDF, E.ON and Innogy who will be sensitive to any measures taken on the sector.

Finally, it will also be worth watching Just Eat amid speculation that a tax on takeaway boxes is to be considered in an attempt to tackle the problem of plastic waste.

HOW THE BUDGET IS RELEASED

At 1230GMT after the conclusion of PM questions, UK Chancellor Hammond will present his latest budget. In terms of the order of proceedings, Hammond will first give his current assessment of the UK economy before releasing the latest OBR forecasts, note that these comments will not cross the wires as a block of text, they will hit as he presents it.

Thereafter, Hammond will present the specifics of the budget i.e. what measures he will take. When his presentation is over which normally takes around an hour, newswires will release the UK Gilt borrowing figures.

Image Credit: See LiChancellor George Osborne delivers his penultimate pre-election Budget 
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