The Chancellor pointed out at the beginning of this budget that a new budget could be required in the spring if a Brexit deal is not reached. On the assumption that a deal is reached, from April 2019 income tax will only be paid on earnings over £12,500 and the 40% higher tax rate will only apply to earnings over £50,000. This amounts to a not-insignificant tax cut. These tax changes, combined with wages rising at the fastest pace since 2009, along with the potential for inflation to fall if a Brexit deal leads to a rally in the pound, mean UK consumers could have reason to feel a bit better off by Easter.

The real question was whether the Chancellor would have to reduce spending elsewhere or raise taxes to accommodate the extra £20 billion for the NHS and higher public sector pay that had already been announced.

In a tremendous stroke of fortune for the Chancellor, the UK fiscal watchdog—the Office for Budget Responsibility (OBR)—revised up its forecast for tax receipts, despite only a modest improvement to its economic projections (see Exhibit 1). This served to fund the spending commitments for the NHS, while allowing for tax cuts, rather than hikes.

Public sector borrowing is projected to decline, from 1.2% today to 0.8% of GDP at the end of the forecast horizon. As a result, public sector debt to GDP is forecast to fall from 85% in 2017 to 74% in 2023.

The Chancellor reiterated the potential for a “Brexit dividend” if a deal gets done. He argued that an economic rebound will further boost tax receipts and free up more funds to spend.

We still expect a Brexit deal to be concluded by year end, because the absence of a deal could derail the fragile recovery on both sides of the channel. A look at recent German business surveys is sufficient to see that business confidence is being affected on the continent, as well as in the UK. While many members of the Conservative Party will not like the deal, we don’t see that they have much option but to support it. The alternative would result in political deadlock that could only be resolved by either another referendum or a general election. Given these limited choices, we expect enough of those politicians who would prefer a hard Brexit to choose to support a softer deal, even if they view it as just the lesser evil.

Overall, this suggests the Bank of England could feel the need to raise rates more than once next year, unless economic growth in the rest of the world proves a drag on UK consumers, whose real after-tax incomes should be rising.

EXHIBIT 1: OBR FORECASTS
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Source: Office for Budget Responsibility: Economic and fiscal outlook, J.P. Morgan Asset Management. y/y is year on year. Oct-18 data for 2017 GDP growth and 2017-18 public sector net debt/ borrowing are confirmed figures. Remaining data are forecasts from OBR. Data as of 29 October 2018.