The British government's first full budget statement since the country voted to leave the European Union last year is likely to be overshadowed by the ongoing Brexit debate even as stronger growth and resilient public finances continue to defy forecasts.
U.K. Chancellor Philip Hammond, the country's de-facto Finance Minister, will deliver the annual budget statement to parliament Wednesday just hours after the Upper Chamber, known as the House of Lords, altered a key government policy aim and demanded a full parliamentary vote on the outcome of any Brexit deal it presents to the European Union.
The Lords move highlights the multiple ways in which Britain's political and economic fortunes are inexorably tied to its post-European future and adds further pressure of the government to articulate a fiscal stance that is, in equal measures, optimistic and prudent.
In that respect, Hammond is likely to play to the country's economic strengths in his budget speech, given that GDP growth has performed well since the June Brexit vote and overall tax receipts -- which are 11.2% higher than last year -- have continued to rise. That will give him some valuable room to manoeuvre if he wishes to offer modest increases in public spending to absorb any post-Brexit shock that may hit Europe's third-largest economy.
Record low interest rates (the Bank of England's key lending rate is 0.25%) and historically attractive borrowing costs (benchmark 10-year Gilt yields trade a 1.12%, more than half the rate of the U.S.) may give Hammond further fiscal options.
However, despite its undoubted resilience, there are concerning signals that the linchpin of U.K. growth -- the British consumer -- is starting to weaken in the face of faster inflation and diminished purchasing power in the wake of the pound's 18% collapse against the U.S. dollar.
Investors will thus look carefully at new growth forecasts from the independent fiscal watchdog, the Office for Budget Responsibility, to see if the slowing pace of consumer spending can be offset by an export boost from the weaker pound.
Economists have noted, however, that any near-term OBR forecast will be clouded with uncertainty owing to the fact that no one can be certain what kind of Brexit deal can be negotiated between London and Brussels, with the former professing an unambiguous desire to control immigration -- even if it means a full exit from the European single market -- and the latter vowing not to allow 'cherry-picking' of the Union's four fundamental freedoms: the unimpaired movement of people, goods, capital and services across member states' borders.
The OBR is equally aware that the negotiations will "determine the scope and scale of any ongoing financial flows between the UK and the EU" and warned late last year that "we do not know enough about the Government's preferences, or its chances of achieving them, to make a precise forecast" on growth.
That said, the watchdog pegged 2017 growth at 1.4% and said inflation will likely peak at 2.6% in the following year.
"In the near term, as the negotiations get under way, we assume that GDP growth will continue to slow into next year as uncertainty leads firms to delay investment and as consumers are squeezed by higher import prices, thanks to the fall in the pound," the OBR said. "But we do not assume that firms shed jobs more aggressively or that consumers increase precautionary saving, both of which are downside risks if the path to Brexit is bumpy."