Philip Hammond must be the first Chancellor to have delivered two Autumn Statements on the same day: his first and his last. In effect, he is swapping an Autumn Statement and a Spring Budget, for an Autumn Budget and a Spring Statement, though he pointed out the latter would normally be a response only to the latest Office for Budget Responsibility forecast. Fundamentally though, it is sensible to assess and make tax and spending changes at the same time.
The more substantive elements of the Chancellor’s statement were rather more contentious.
Everything the government says and does has to be defined by how it is influenced by—and reacting to—Brexit. Leaving aside matters of personal finance, the government has to be judged on the basis of the 3 R’s: the roadmap of where the economy is going in terms of growth, inflation, public borrowing and so on; the restructuring of the economy that is now essential in order to mitigate the adverse economic consequences of Brexit; and the redistribution, for which the PM herself took responsibility when assuming her position and more recently at the Conservative Party conference. So how did Hammond do?
The roadmap looks much more difficult. The OBR has revised economic growth down to 1.4 per cent in 2017 (originally 2.2 per cent), and 1.7 per cent in 2018 (2.1 per cent). It assumes growth will stay around 2 per cent after that. But in the next couple of years, rising inflation will eat away at wages and benefits, and unemployment will rise a bit. Cumulative public borrowing over the next five years is now put at £122bn more than envisaged in March, the major part of which is attributable to the consequences of the Brexit referendum. The fiscal surplus target for 2019/20 has been abandoned, as foreshadowed. The government now wants balance in public finances restored as soon as possible along with a new welfare cap rule in the next parliament, and a decline in debt as a share of GDP to start in this parliament. Debt is seen peaking at just over 90 per cent of GDP in 2017/18 before starting to fall.
These forecasts, however, are entirely dependent on what happens to the Brexit process and outcome. The OBR couldn’t get a sensible answer from the government as to what Brexit meant, other than “Brexit means Brexit,” and assumes only that Brexit happens in 2019, that for a decade UK trade growth will be smaller, and that net migration falls—though not to the level of tens of thousands. However, between 2018-2012 anything could happen, from a hard Brexit, which would make the OBR’s forecasts far too optimistic, to a longish transitional arrangement with the EU under which the forecasts may even be too conservative. The way things pan out will be decisive for business investment and productivity, on which the country’s fortunes depend.
The restructuring did get a small boost. Hammond announced a £23bn infrastructure or productivity fund, dispensing funds over the next five years. Research and development, housing, transportation, and communications will all be beneficiaries. Greater regional distribution was emphasised, as well as the intention of infrastructure spending of 1-1.2 per cent of GDP annually after 2020, based on recommendations from the National Infrastructure Commission. The other possible major restructuring could come in the promised review of the impact of ageing on public services. There was the veiled threat—quite likely—that the next parliament would terminate the Triple Lock formula for state pension spending. This makes a lot of sense, if accompanied by other age-related financing reforms.
Finally, on redistribution beyond the additional spending on infrastructure which is mainly financed out of borrowing, there will be changes to the minimum wage, universal credit system and other modest policy changes but these could be swamped by rising inflation, especially if wage and salary formation remains restrained. The Resolution Foundation, for example, will have fuller analysis later.
The overall judgement today then is a worse roadmap, mainly due to Brexit; welcome, if still modest, restructuring changes but precious little else to encourage higher private investment; and little of substance so far on redistribution. The government’s strategy still hangs on how it manages the Brexit process, the possibility of another sharp decline in sterling, and the continued failure to get investment and productivity to rise more significantly.
On the 17th of November, Prospect launched Brexit Britain: the trade challenge. A publication designed to act as a guide for parliamentarians, officials and businesses with a stake in the UK’s changing relationship with the world following Brexit. To see the complete contents of the report please click here.
For speaker and partnership opportunities, please contact david.tl@prospect-magazine.co.uk.You can also receive the full “Brexit Britain: the trade challenge” report as a fully designed PDF document. To do so, simply enter your email below. You’ll receive your copy completely free—within minutes.
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