March 11, 2018 / 10:14 AM / 9 months ago

UK's Hammond sees light at end of austerity tunnel, but debt must fall

LONDON (Reuters) - British finance minister Philip Hammond said on Sunday he might be able to relax his grip on public spending at the end of this year, but he stuck to his plan to cut the country’s high debt levels.

Britain's Chancellor of the Exchequer Philip Hammond arrives in Downing Street in London, March 6, 2018. REUTERS/Peter Nicholls

Britain’s budget deficit has probably fallen to about 2 percent of annual economic output in the current financial year, which would be its lowest since 2002 and way down from the 10 percent it reached in 2010, when many government departments began cutting spending sharply.

“There is light at the end of the tunnel because what we are about to see is debt starting to fall after it’s been growing for 17 continuous years,” Hammond told BBC television ahead of a half-yearly update on the public finances on Tuesday.

“That is a very important moment for us. But we are still in the tunnel at the moment. We have to get debt down.”

Faced with uncertainty about what leaving the European Union will mean for the world’s sixth-biggest economy and frustration among voters who have coped with eight years of austerity, Hammond has already pushed back a target of wiping out the deficit into the mid-2020s.

He came up with extra spending in a budget plan in November.

But he remains under pressure from the opposition Labour Party and some lawmakers in his Conservative Party to spend more on the over-stretched state health system and other services.

Labour’s finance spokesman John McDonnell said Hammond’s performance was nothing to celebrate.

“Last year, we had the lowest economic growth in the G7 countries,” he said on Sunday. “Wages are below what they were in 2007-2008, before the banking crisis.”

He said managers in the health service, school head teachers and local government official were bearing the brunt of the Conservatives’ economic policies, and up to 11 million people would be hit next month by cuts in benefits.

FLEXIBILITY

Stressing the limits on his room for maneuver, Hammond told the BBC it was not clear that recent improvements in Britain’s economy - such as a pickup in weak productivity growth - represented a long-term change.

“We need to look at what is happening sustainably in the economy,” he said.

“But if there is the flexibility, the space to do something, then we will decide in the autumn how to do that,” he said, adding the government would continue to balance the need for investment against the push to bring down debt.

Britain’s overall public sector net debt totaled 1.7 trillion pounds in January, 84 percent of gross domestic product and more than double its level before the financial crisis. Hammond says that restricted Britain’s ability to respond to future economic shocks.

Hammond confirmed he plans no new tax or spending measures in Tuesday’s budget statement which will be largely a low-key update of economic forecasts. He is also due to launch some policy reviews.

Writing by William Schomberg, Editing by Paul Sandle and John Stonestreet

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