BudgetNov 1 2018

What is the Brexit dividend?

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What is the Brexit dividend?

This is perhaps not surprising as, just one day before the Budget 2018 took place, Chancellor of the Exchequer Philip Hammond said he would call for another Budget if the UK crashes out of the EU with a 'no deal' in March 2019. 

Mr Hammond said: "We would need to look at a different strategy and frankly we'd need to have a new Budget that set out a different strategy for the future."

So what does the Budget mean for Brexit? 

The Chancellor was unable to provide any detail about the Brexit dividend itself in terms of quantum and timing. This is quite possibly because he does not know.Marcus Brookes

In the Budget documents, it states: “The Government is seeking a deep and special relationship with the EU, encompassing economic and security cooperation. The government is confident of getting a good deal, but has a responsibility to plan for all scenarios, including the unlikely event no mutually satisfactory agreement can be reached with the EU.”

The government announced an additional £500m of funding for 2019 to 2020 which it has allocated to Brexit. 

The government has already set aside £2.2bn to departments and devolved administrations to support its preparations for Brexit. In the Autumn Budget 2017 the government earmarked an additional £1.5bn for 2019 to 2020. 

The extra £500m announced in this year’s Budget brings the total amount the Government has invested in preparing for Brexit to £4bn since the referendum in 2016. 

Brexit dividend 

One of the few mentions of Brexit that stood out, was the “Brexit dividend”. 

Mr Hammond told an eager House of Commons: “We are at a pivotal moment in our EU negotiations. We will harvest a double ‘deal dividend’. We are confident that we will secure a deal which delivers that dividend.”

But what that dividend ultimately means has stoked differing opinions among experts. 

Marcus Brookes, head of multi-manager at Schroders, says: “The Chancellor today announced spending measures that were going to be funded by additional fiscal headroom but also what he has described as the Brexit dividend.”

“The Chancellor was unable to provide any detail about the Brexit dividend itself in terms of quantum and timing. This is quite possibly because he does not know,” he adds. 

The Office for Budget Responsibility (OBR) revised upwards its forecast for UK economic growth. 

Ahead of the Budget, the growth forecast for 2019 was revised upwards to 1.6 per cent from 1.3 per cent forecast in March. 

For 2020, the growth forecast was revised upwards to 1.4 per cent from the previous 1.3 per cent. 

Edward Park, investment director at Brooks Macdonald, says: “The reality of the government’s fiscal situation is that it will be dominated by economic growth in 2019 to 2020 and this will be highly dependent on the outcome of the Brexit negotiations.

"The fact that the OBR increased its near-term growth forecasts but left its longer term projections subdued is telling, in our view."

While Mr Park believes that an agreement between the EU and UK will generate some form of “dividend”, he warns: “Irrespective of today’s announcements, political risk looks set to continue to dominate UK economic and investor sentiment until clarity on Brexit is provided.”

Greater volatility? 

Mr Park also outlines the risk to UK asset prices if the Brexit negotiations are prolonged.

“The closer we get to the secession date without a deal, the more volatility we expect to see," he explains. 

"While UK assets will likely experience a relief rally if a deal is struck, depending on the detail, political uncertainty should remain elevated for an extended period and this is likely to weigh on domestic economic growth, and potentially UK assets, in the coming years.”

But David Zahn, head of European fixed income at Franklin Templeton, says Mr Hammond’s measures, coupled with the lower than expected budget deficit, will largely be supportive for gilts. 

Mr Zahn says: “The outcome of the Budget was as expected with the largest spending increase going to the NHS, as had already been flagged by the Prime Minister. However, even with the increase in spending and the bringing forward of tax cuts, the UK budget finances look in good shape, with the budget deficit continuing to decline in absolute terms."

According to Mr Zahn, this means the amount of Gilts required to be issued will also decline for 2018 to 2019 to £97.5bn down from £111.5bn in the previous year. 

But he warns that the prevailing uncertainty from Brexit will also bring volatility to the Gilt market. 

“Over the past decade, investors have had the luxury of continued strong performance in gilts, but in light of today’s announcement and increasing global uncertainty, investors will need to be careful about how they manage the associated risks, as a failure to engage with every portion of their portfolios in these volatile times could have a significant impact,” Mr Zahn adds.

saloni.sardana@ft.com