March 8, 2017 / 12:03 AM / 5 months ago

UK's Hammond readies budget plan in the shadow of Brexit

LONDON, March 8 (Reuters) - Britain's finance minister Philip Hammond will say on Wednesday he will not relax his grip on the public purse, despite the economy withstanding the initial Brexit shock, as the challenge of actually leaving the European Union approaches.

Hammond is due to announce at 1230 GMT the first full budget statement since the referendum decision to take Britain out of the bloc, which had been expected to deliver a quick, sharp economic blow to Britain.

Instead, consumers carried on spending heavily and made Britain the second-fastest growing economy in the Group of Seven rich nations in 2016.

Hammond is unlikely to count on that lasting. There are already signs that shoppers are turning more cautious as the tumble in the value of the pound following the referendum pushes up inflation.

Furthermore, his budget statement will be overshadowed by Prime Minister Theresa May's plan to launch Britain's EU divorce talks before the end of March, starting a process that is expected to make companies wary about long-term investments.

The EU buys about half of Britain's exports but May has said her Brexit priority is to control immigration rather than keep the country in the bloc's single market.

When he stands up in parliament to read out his tax and spending plan, Hammond will be able to announce some rare good news about the budget deficit, helped by strong tax revenues as the economy defied the predictions of a slowdown last year.

But rather than spend any windfall, he has already signalled he will stick to his plan to eliminate what is still one of the biggest budget deficits among the world's rich countries during the first half of the next decade.

Hammond, who has been nicknamed Spreadsheet Phil for his unflashy approach to running the economy since he took over from George Osborne last year, plans to build up a reserve fund in case he needs to help Britain's economy through a Brexit slowdown ahead.

That means any extra spending now on stretched public services, such as care for the elderly, will have to be funded by higher taxes, for example on sales of tobacco, or by spending cuts elsewhere.

Hammond is under pressure to spend more on other services such as health and prisons, as well as to ease the hit to smaller retailers from an impending property tax rise.

But at the weekend, he took aim at the opposition Labour Party for opposing the squeeze on public finances.

"That approach is not only confused, it's reckless, unsustainable and unfair on our young people, who would be left to deal with the consequences," he wrote in the Sunday Times.

Hammond is hoping that voters will continue to stomach the squeeze on public spending, the effects of which are set to intensify, especially for poorer households which have seen many of their welfare benefits frozen while inflation is now rising.

Instead, Hammond is likely to turn attention to his efforts to address the long-term weaknesses of Britain's economy which, if fixed, could allow economic output and wages to grow faster in the future.

The government has said it will spend more on skills training for 16- to 19-year-olds and provide more funding to schools. Last year, Hammond said he would spend more on infrastructure in areas such as transport and broadband.

He is also expected to announce a review of how Britain funds its social care spending which is set to rise as the population ages. Details of the review may be announced at a budget update in November which Hammond has said he wants to become the main fiscal event of the year. (Editing by Hugh Lawson)

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