Slight Flaw in the Budget

Phillip Hammond delivered a reassuringly dull budget this week. The furore over the self-employed will pass or be diluted. Just what investors like to see. In fact, Hammond holds many of the traits fund managers like to see in CEO’s; ‘reassuringly dull,’ covers it nicely. Mr Hammond said that according to the OBR borrowing will be less than predicted that borrowing will be £51.7bn in 16-17, down from the predicted £68.2bn. The Chancellor has promised in fact to drop the deficit below 2% by 2021 and eliminate it completely shortly thereafter.

That would take nothing short of a miracle.

Britain’s national income has exceeded expenses expressed as a percentage of GDP for just two brief moments in the last 30 years. The first followed the stock market’s mid-80’s surge and the second was in the final stages of the Tech boom in the late 90’s. The market peaked shortly thereafter turning the surplus into a big deficit. The financial condition of the UK has been deteriorating for decades now. A 1.5% budget surplus in 2000 reversed before it reached its ’87 peak of 2% in 1988. The budget gap wasn’t closed at all in 2007 prior to the financial crisis despite booming stock and property markets. The subsequent 2008-9 deficit beat all previous records. In terms of debt to GDP, UK debt in 2010 was the third highest in the world being beaten only by Greece and Italy.

This is probably as good as it gets. The living-in-fairyland inhabitants of Westminster moan without pause about austerity. They are in for a shock. Mr Hammond’s positive read on government finances is not a ramp for take-off; it is a warning that the edge is near.