Autumn Statement: what to expect on the 23rd

Still reeling from last week's shock election of Donald Trump and struggling to make progress in Brexit negotiations, Theresa May will urge chancellor Philip Hammond to spend this weekend fine-tuning his first Autumn Statement in front of the mirror.

So far, markets have survived surprise events and increasing uncertainty, but consumer and business confidence is vulnerable once Article 50 is triggered, and economists expect UK growth to slow sharply in 2017. Next Wednesday will be new boy Hammond's first real test, and a great opportunity to unveil plans to boost growth.

With the stage set very differently to previous Autumn Statements, little has been leaked beforehand. He will have the opportunity to review the rules set by his predecessor, but Hammond has already warned this will be a "fiscal reset", not a "splurge".

According to Deutsche Bank, the chancellor might deliver a "lite" fiscal adjustment next week and keep some "fiscal space" for later, in case he needs it.

Any give-aways will likely be directed at families 'just about managing' - so-called 'jams'"We suspect the welfare spending rule will be substantially re-written if not dropped entirely," the broker says. "To help deal with potential further breaches of these rules in the future Hammond plans a more flexible regime."

Any give-aways are likely to be directed at families that are "just about managing" - so-called "jams".

Of the ideas mooted to help them, Hammond could easily freeze fuel duty for motorists, cut air fuel duty and increase the tax-free personal allowance. He is also likely to offer help to encourage low-income families to save. Good luck on that last point.

Infrastructure will be the buzz-word, with the government tipped to unveil a series of measures to trigger the Industrial Revolution 2.0, underpinned by high tech research and development.

Following a slowdown in the construction industry, direct stimulus could extend the mature business cycle after a seven-year up trend, supporting tool hire and construction companies like Speedy Hire, our resident stockpicker said this week.

Companies could also benefit from extra spend on infrastructure; firms like Hill & Smith who make temporary motorway barriers and gantries. There's a good chance their US operations will do well, too, following president-elect Donald Trump's pledge to boost infrastructure.

Previous targets unfeasible

The Office for Budget Responsibility (OBR) will issue its first projections on the impact of the Brexit vote and, although third-quarter GDP beat expectations and inflation is poised to rise rapidly, forecasts are expected to be grim.

Look for a real GDP estimate slightly above today's consensus at 1.3%, and a CPI inflation forecast more in line with the Bank of England at 2.6%.

Deutsche Bank reckons public sector net borrowing will return to a surplus in 2021/22Combine this with low wage recovery, weaker housing transaction levels, and slowing population growth, and previous fiscal targets are now unfeasible.

The £10.4 billion surplus pencilled in for 2019-2020 could now very well be a £14.9 billion deficit, recent analysis from the Institute for Fiscal Studies (IFS) suggests. Its experts warned the chancellor that the impact of Brexit may force austerity to continue beyond the next election to eliminate the budget deficit built up during the financial crisis.

Deutsche Bank reckons public sector net borrowing (PSNB) will return to a surplus in 2021/22, two years later than ex-chancellor George Osborne predicted in the 2016 Budget. Net debt could peak at 87% in 2018/19, from 71.3% in 2010/11.

10 of the 12 UK fiscal targets have been abandoned or missed since 1997According to the broker, expect a £30 billion increase in PSNB on average over the five-year plan. "Our projections assume a net relaxation of the fiscal stance over the next three years of 0.75% of GDP," it says. "It may be less than this. Either way, we expect the chancellor to say he is keeping some 'fiscal space' in reserve if needed."

So this will be no easy debut budget for Hammond. He must reset fiscal expectations without undermining the government's credibility. To be fair, he's in good company: 10 of the 12 UK targets have been abandoned or missed since 1997, according to the IFS.

To make next Wednesday less of a shock, we took a look at what Hammond might pull out of his red box on the 23rd.

Tax

Hammond wants to fulfil the Conservative manifesto pledge to increase the personal income tax threshold from £11,000 to £12,500, and raise the 40p higher rate of tax from £43,000 to £50,000.

This will hit clearly hit income tax revenue at a time when the government is already struggling to return to pre-crisis levels. It could also cause a spike in consumer price inflation (CPI) above targets, potentially hitting receipts further.

It's good news for businesses: Hammond wants to continue reducing corporation tax from 20% to 17% by 2020 to ensure the UK is still an attractive place to do business in/with, countering post-Brexit reluctance.

Osborne spoke of a reduction to 15% at the end of his tenure, but Hammond has quashed this suggestion.

Lifetime ISA

Launching in April 2017, the Lifetime ISA is still rough around the edges. If aged between 18 and 40, a saver can put up to £4,000 a year in their LISA, and the government will add a 25% bonus.

This gives savers the chance to earn a bonus of up to £32,000 in total. Unfortunately, savers only get to keep their entire bonus is they use that money to buy their first home or are over 60, incurring heavy charges otherwise.

Old Mutual Wealth pensions expert Jon Greer reckons they need a re-think to make them work better. He suggests Hammond allows for third-party funding, much like with Junior ISAs and pensions.

Pensions

Pensions were given a complete face-lift during George Osborne's six-year reign at Number 11. Amid so much geopolitical uncertainty, Hammond is unlikely to make any big changes to pensions freedoms, although there is room for tinkering.

While some fear lifetime and annual tax-free allowances could be reduced in a raid on high-earners, some think a flat rate or age-related relief could be introduced.

These are not easy decisions, however, and shouldn't be rushed, so any radical changes will likely be held back until the Budget next spring.

Infrastructure

We know infrastructure is a priority for the government, especially after creating an Economy and Industrial Strategy cabinet committee and approving the much disputed, controversial third runway at Heathrow.

There's been chatter around the launch of infrastructure bonds to support UK-based projects. Available to the wider investment community, these bonds will provide long-term investors with attractive alternative to mainstream bonds, as a small liquidity sacrifice is "amply compensated" by additional yield, says Stephen West at Gravis Capital Partners.

On the cusp of the new age of industrial revolution, the government will rely on research and development to drive activity and growth.

Despite the recent slowdown in services, the UK has retained its stronghold on a range of sectors, including automotive, industrial machinery, and aerospace and defence.

With sterling's depreciation and low production costs, the UK has an advantage, reckons Deutsche Bank.

Potential winners: Construction and tool hire companies

Housing

Heavily criticised increases to stamp duty, a flagship policy of Osbornes, could be handed back by Hammond next Wednesday. The additional 3% stamp duty on second homes and buy-to-let properties has stifled the high-end market, especially in central London.

Offering a 20% discount to first-time buyers, the chancellor could use the Autumn Statement as a platform to outline the government's Starter Homes scheme, announced at the end of 2014.

The Help to Buy scheme could also be extended. A £5 billion housing and construction fund was created earlier this month, protecting investment in the housing sector to tackle the housing deficit.

Potential winners: Housebuilders outside central London

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.