Mr Hammond has been hemmed in on one side by sobering economic and fiscal forecasts; on another by public services and national infrastructure showing the strain after seven years of austerity; and on a third by members of his own party, willing him to fail. So when it came to delivering his third Budget, how did the Chancellor play his unlucky hand?

Mr Hammond tried to strike a note of economic and fiscal optimism. As expected, the Office for Budget Responsibility (OBR), the Chancellor’s independent economic and fiscal arbiter, lowered its estimate for public borrowing in 2017/18 by £8.4 billion, on the basis of stronger than expected tax revenues and lower public spending so far this year. The country’s debt burden is still expected to start falling next year, allowing Mr Hammond to argue that we have turned the corner on the public finances. He was also keen to highlight the upward trend in employment.

Using what little wriggle room he had, the Chancellor portrayed this as a Budget creating “a country fit for the future”. The reclassification of housing association debt from the public to the private sector has conveniently allowed Mr Hammond to shift his fiscal goal posts by around £5 billion a year. He also outlined plans to raise additional taxes from the corporate sector, including via indexation freezing, and through the “usual suspect” of clampdowns on tax evasion and avoidance. As a result, he was able to loosen his fiscal stance by £7 billion over the period to 2023 – a little more than expected ahead of his speech.

Some of this additional funding has gone to the National Health Service. Mr Hammond has allocated an extra £3.4 billion over the next three years, presumably hoping to avoid negative headlines over the winter months, and additional capital spending of £4.2 billion out to 2023. But the Chancellor is still intent on meeting his self-imposed fiscal goals, lowering government borrowing to 2% of national income by 2020-21 and eliminating the deficit altogether by the mid-2020s.

Now for the bad news……………
The OBR downgraded its outlook for UK GDP growth both in the short and medium term by more than expected. The short-term cuts to projected growth rates of 1.5% this year and 1.4% next, from 2.0% and 1.6% respectively in the March Budget – are a little below economists’ current consensus. They are also disappointing for a small, open economy that would normally benefit from a world economy that is expanding at its fastest sustained pace since the global financial crisis. But it is the long-term downgrades – to growth rates averaging an anaemic 1.3% in 2019 and 2020 and only modestly higher beyond – that are ultimately more damaging to the Chancellor’s aspirations.

And Mr Hammond’s Brexit-fighting “war chest” has shrunk. The worsening economic news, combined with the fiscal impact of Mr Hammond’s U-turn on raising taxes for the self-employed back in March and the £1 billion post-election sweetener for the Democratic Unionist Party, has cut his headroom relative to his own fiscal rules from £26 billion at the time of the previous Budget to £14.3 billion currently. He chose to position this as a positive choice, to help hard-working families and ready the economy for the future. However, it leaves him with a very small margin to play with, given total tax revenues and public spending commitments amounting to hundreds of billions of pounds each year.

The Chancellor attempted to fight back on the OBR’s negative productivity message, with some productivity-boosting measures of his own. After all, the only way the UK can hope to escape its current economic challenges is by improving its productivity performance, enabling economic growth and tax revenues to rise faster than the OBR currently expects. Mr Hammond set out parts of the government’s industrial strategy, allocating tens of millions of pounds to skills training and transport infrastructure over the next few years, and hundreds of millions to increasing research and development tax credits. All other measures to create “an economy fit for the future” are, however, dwarfed in terms of funding by the £3 billion to be allocated over the next two years to preparing for EU exit – a concession from Mr Hammond to his pro-Brexit critics.

Housing market in focus
As expected, Mr Hammond also portrayed this as a Budget to tackle the UK’s “broken” housing market – and this is also where this Budget’s inevitable surprise came from. He repeated his goal of raising house building to 300,000 new homes per year, aided by the commissioning of new building on public land and funding for local authorities. This will go some way – albeit modestly – towards addressing “supply side” problems in the housing market. But the “demand side” measures announced today, particularly his ‘rabbit out of the hat’ of a stamp duty cut for most first-time buyers, risk adding more to house prices than to addressing issues with the housing stock. Indeed, that’s exactly what the OBR is predicting. It believes the stamp duty cut will increase house prices by 0.3%, mainly in 2018, with the biggest gainers therefore being people who already own property – not first-time buyers themselves.

From April 2019, UK tax will be charged on gains made by all categories of non-UK resident sellers on both direct and indirect disposals of UK real estate, extending existing more limited rules that apply only to residential property. This represents a fundamental change to the current rules governing the taxation of chargeable gains on UK real estate.

UK real estate taxation                                                                                            
The new rules are intended to create a single regime for disposals of interests in both residential and non-residential property. Currently, only the direct disposal of an interest in UK residential property by a non-UK resident individual, trust, personal representative or closely-held company falls within the charge to UK tax on chargeable gains. Direct disposals of residential properties by non-UK resident widely-held companies are not caught, nor are indirect disposals of residential property or any direct or indirect disposal of commercial property.

With effect from April 2019, gains arising on the disposal by a non-resident of any type of UK property will be subject to corporation tax or capital gains tax in respect of gains accruing after April 2019 (with a rebasing as at April 2019). This will also apply to indirect disposals – i.e., disposals of shares in “property-rich” companies (which, broadly speaking, are those where 75% or more of the company’s gross asset value at disposal is represented by UK real estate) by a person who holds, or who has held at some point during the 5 years prior to the disposal, a 25% or greater interest in the company. Although the new charge will apply only to gains arising on disposals after commencement, the 25% test will take into account ownership before that time and will also consider the interests of the non-resident’s related parties in determining whether the threshold is met. The new rules will catch both a direct disposal of the interest in the property-rich company as well as a disposal of an interest in a holding company or equivalent entity with a structure of entities beneath it which, taken together, meet the property richness test.

In order to help HMRC enforce the new rules, the Government intends to impose a reporting requirement in some circumstances (for example, in the context of an indirect disposal) on certain UK advisers who are aware of the conclusion of the land transaction.

Anti-forestalling measures will be introduced with effect from yesterday to prevent restructuring pre-April 2019 to make use of the UK’s Double Tax Treaty network in a way that would prevent the UK imposing tax. The anti-forestalling rule will remain in force as an anti-avoidance measure after the new charge is introduced, until such time as relevant treaties have been amended to prevent any risk of abuse.

In response to the March 2017 consultation on bringing non-resident corporate landlords into the charge to corporation tax in respect of rental income, many people highlighted the complexity of the Annual Tax on Enveloped Dwellings-related capital gains tax rules. In response, the Government intends to structure the new rules announced yesterday in such a way that, as far as possible, one regime applies for all disposals of interests in UK real estate by non-residents, and that the regime is robust and cohesive. As a result, the Government will be considering the case for harmonising the existing ATED-related gains rules within the wider regime for taxing non-residents’ gains on UK property and how to meet the objective of simplification in doing so.

This announcement was somewhat foreseeable, given the changes made over the past few years, to level the playing field in respect of the taxation of UK property between UK residents and non-UK residents. It was also the next logical step following the Government’s consultation on bringing non-UK resident corporate landlords within the scope of UK corporation tax (as opposed to UK income tax) in respect of rental income. The Government is due to announce the results of this consultation shortly, although it is clear that this change will also be made.

The Government has announced that the changes will be open to consultation, which will run to 16 February 2018. However, it is clear that many aspects of the reform have already been fixed (such as who is in scope, the commencement date and the core features of the provisions governing direct and indirect disposals) and that the Government is, in fact, only consulting to ensure that the legislation is sufficiently well targeted. The Government will publish draft legislation in late summer 2018.

So how did he do?
Budgets in the early years of an administration are normally when Chancellors get the “heavy lifting” done – raising taxes or shifting spending priorities in anticipation that this will pay dividends in time for elections up to five years into the future. However, these are not normal times.

Mr Hammond’s constraints meant that, despite his best efforts at vision and vigour, this Budget went with more of a whimper than a bang. A bold approach would have been to take housebuilding and infrastructure spending out of his budgetary rules altogether, arguing that they are too important to be left inside a self-imposed fiscal straitjacket.

Today could have been a golden opportunity to take a distinct, long-term view of the UK’s prospects, tackling the country’s productivity performance head on. An expanding economy would underpin confidence, spending and tax revenues, ultimately benefitting the public finances.

Instead, the two most notable measures in today’s Budget were the £3 billion allocated to Brexit preparations and the stamp duty cut for first-time buyers. The first was directed at Mr Hammond’s critics, many within his own party, who would like to see him replaced. The second was intended to provide a boost for young, aspiring house purchasers but may ultimately benefit their middle-aged peers.

Market implications
The Budget is likely to be received calmly within equity, currency and, perhaps most importantly for the Chancellor, debt markets. However, as already noted, it was delivered against a backdrop of a very disappointing UK economic outlook and with considerable uncertainty around the likely implications of Brexit. While Mr Hammond outlined a variety of measures that will affect the corporate sector, this anaemic growth environment is likely to have the greatest impact on companies operating in the UK over the coming years.

The Chancellor announced a raft of initiatives to improve productivity and to enhance the UK’s position in the technology and digital economy, the most material of these being the increase in the R&D expenditure credit to 12%. Time will tell as to the efficacy of these initiatives, but they will broadly be welcomed by the business sector.

Corporation tax rates were left unchanged, remaining competitive with our global peers. However, several initiatives, such as the freezing of the indexation allowance and the application of income tax to royalties relating to UK sales, will result in companies experiencing a tax increase.

The measures on the housing market were well-trailed overall, and were broadly in line with investors’ expectations. However the Chancellor is obviously losing patience with what he sees as the large housebuilders’ inefficient use of their land banks. His announcement of an “urgent review” into the “significant gap between the number of planning permissions granted and the number of homes built” reflects this impatience, with housebuilders’ shares weakening on the announcement. The supportive comments on the purpose-built private rented sector will be welcomed by institutions eager to participate further in this area.

Stability for pension and savings
Mr Hammond made few changes to the UK savings market. This will be welcomed by an industry that had called for stability in pensions and investments policy following some fairly significant changes over the past few years.

As a follow-up to the Treasury’s recent Patient Capital Review, the Chancellor announced a £20 billion action plan to unlock new investment in UK “scale-up” businesses. Alongside this will be a new fund through the British Business Bank, seeded with £2.5 billion of public money. The Chancellor also made reference to “facilitating pension fund access to long-term investments”. All these measures will be welcomed, and may allow the further closing of the financing gap at the smaller end of the private equity market.

The Chancellor’s statement did not move markets significantly, an outcome that he is likely to be happy with. It was also a statement delivered in the context of a global economy that, while growing at a healthy pace, may be seeing the liquidity tide of low interest rates and quantitative easing starting to ebb. The outcomes of events beyond our shores are therefore, once again, likely to have more influence on UK markets, in all their forms, than the Chancellor’s pronouncements from the dispatch box.