Hammond aims to ease UK living standards squeeze, focus on budget

LONDON (Reuters) - Britain's finance minister will say on Wednesday that he is taking the edge off a benefits squeeze for low-paid workers, but that fixing the public finances will be a bigger priority as the country gets ready for Brexit.

Philip Hammond's first detailed economic policy announcement of the new government at 1230 GMT will focus on tackling a still large budget deficit and injecting more dynamism into the world's fifth-biggest economy, his office said.

When he became finance minister in July, a few weeks after Britain's vote to leave the European Union, Hammond said the country might need a "fiscal reset", raising the prospect of a big shift in economic policy towards more government spending or large tax cuts.

But so far, the economy has held up better than expected to the initial Brexit shock and Hammond has said he wants to keep his powder dry for tougher times that probably lie ahead as Britain proceeds with its divorce from the European Union.

The Treasury said low-paid workers would lose tax credits at a slightly slower pace as their earnings rise, softening some of the impact of a sharp rise in inflation caused by the Brexit hit to the pound.

In another attempt to address the frustrations of "just about managing" families who have been promised help by Prime Minister Theresa May, Hammond will take steps to make more homes available to low-income renters and buyers.

The government will earmark 1.4 billion pounds of new funding to help build 40,000 new homes over the next five years, the Treasury statement said. There will also be a crackdown on fees imposed on tenants, a bitter complaint of many renters.

"HIGHLY CONSTRAINED"

Alongside the measures to help low earners, the Treasury said Hammond would emphasize that the best way to improve living standards was by fixing the public finances and boosting Britain's low productivity growth.

His predecessor George Osborne brought the budget deficit down from 10 percent of gross domestic product in 2010 to 4 percent in the financial year that ended in March.

But it remains among the highest of the world's rich nations and Hammond has said public debt levels, equivalent to 84 percent of GDP last year, are "eye-wateringly large".

Although he has dropped Osborne's target of turning the deficit into a surplus by 2020, Hammond has stressed he will not go soft on the public finances.

"This economy does need investment but it also needs us to maintain credibility with markets," he told ITV (LON:ITV) television on Sunday. "We are highly constrained in how we can approach this. We need to do it cautiously and appropriately."

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Britain's budget forecasters are likely to say the government will have to borrow around 100 billion pounds more over the next five years than they forecast in March, mostly because of Brexit, according to forecasts by economists.

The Office for Budget Responsibility is also expected to chop its forecasts for economic growth in the coming years.

Despite the bleak outlook, the forecasts could bolster Hammond's argument that Britain must consider all options for its future relationship with the EU.

Other ministers have proposed a tougher approach to the Brexit negotiations, raising the prospect of more restrictions for exporters and unsettling investors who have pushed down the value of the pound further in recent weeks.

On productivity, the Treasury said Hammond would announce billions of pounds' worth of help for research and development.

In the run-up to Wednesday's announcement, Hammond has also announced new funding for road building and broadband networks.