Philip Hammond: the reset chancellor?

If Theresa May’s task yesterday at the Conservative Party Conference was to cast aside at least one veil from the elusive meaning of Brexit, Philip Hammond’s today was to disambiguate the “reset” in fiscal policy he prefigured soon after replacing George Osborne as chancellor in July. The full meaning of “reset” will not emerge until he presents his first fiscal set-piece, the Autumn Statement, on 23rd November. But did he read the funeral rites for austerity today or is the reset chancellor really the continuity chancellor?

Already before she appointed Hammond as chancellor, May had abandoned the goal of achieving an overall budgetary surplus by the end of the parliament in 2020. A pet project of Osborne, this would have meant revenues exceeding not just current spending but investment as well. Not only has that target been ditched but Hammond will also borrow more to finance higher investment, including for example an extra £2 billion for homes built on public land. Furthermore, he held out the prospect of “targeted public investment” in order to upgrade Britain’s woeful public infrastructure.

Hammond also kept his options open about using fiscal policy to support the economy. When he first spoke of a “reset” in the summer he seemed to open the door to a possible fiscal stimulus such as a temporary cut in VAT in his Autumn Statement. Since then the economy has been more resilient than feared in the immediate aftermath of the Brexit shock, when both business and consumer confidence nosedived. Moreover, the Bank of England was swift to administer a monetary stimulus, by cutting interest rates and launching a fresh round of quantitative easing in early August. Even so, Hammond emphasised that “fiscal policy may also have a role to play” in steadying the economy over the coming months.

All this suggests a clean break with austerity—yet in fact there was a striking degree of continuity between what Hammond set out today and Osborne’s policies. The new chancellor said that the budget deficit—4.1 per cent of GDP in the fiscal year that ended in March—“remains unsustainable” and that the work of deficit reduction was “not finished.” In fact progress in reducing the deficit in the first five months (April to August) of the current fiscal year has been disappointing, suggesting that it will remain stubbornly high.

Hammond did not resile from the task of fiscal consolidation and he insisted on the need to control current (“day-to-day”) spending. That is an unwelcome message for anyone hoping that there would be relief from the squeeze on already straitened public services. Weaving together the new and the old, Hammond said that his Autumn Statement would set out “our plan to deliver long-term fiscal sustainability while responding to the consequences of short-term uncertainty and recognising the need for investment to build an economy that works for everyone.”

That emphasis on the long-term makes sense. For much more worrying than short-term movements in the deficit is the longer-term impact of Brexit on the economy and the public finances. Leaving the European Union will hamper both trade and inward investment. The long-term damage to GDP will be even greater if productivity is hurt as well, as seems likely. That in turn will throw a wrecking ball at the public finances since GDP is the tax base.

This explains why Hammond devoted much of his speech to the cause of improving productivity, the engine of economic growth. Yet setting such an aspiration is not enough. Successive chancellors have sought to raise productivity growth, to little or no avail. Over a decade ago Gordon Brown applied himself to the task even when productivity growth was quite respectable. Since the financial crisis, it has stalled. No one is clear why. As David Miles, a former member of the Bank of England’s monetary-policy committee, recently wrote, “it still remains largely a mystery why productivity has been so poor eight years after the crash.”

The theme of the conference was “a country that works for everyone.” Yet a year ago Osborne delivered a speech in which he depicted the Conservative party as “the builders” who were building for “the working people of Britain”—“the people who just get on with it.” Hammond promises a better infrastructure but Osborne also pledged to build “new roads, and railways, and runways.” Speaking in Manchester, Osborne said that the Tories were putting "the power into the Northern Powerhouse” and decentralising control in order to foster local enterprise. Speaking in Birmingham, Hammond said that revitalising the “large parts of our country” that feel left behind was a priority and that “we have passed a tipping point in devolution.” The real difference between the two chancellors is in their circumstances. Osborne could realistically expect a strong economy whereas Hammond must deal with one weakened by Brexit.