Philip Hammond has promised a Brexit dividend to boost spending on public infrastructure projects and vital services, after forecasts of lower government borrowing over the next five years swelled the chancellor’s war chest to £26.6bn.
The chancellor said he remained confident that a Brexit deal would be agreed by parliament in the next few weeks and he could include the extra funds in a three-year Whitehall spending review, which he plans to begin before the summer recess.
Announcing his spring statement, he said there would be “a significant short- to medium-term reduction in the productive capacity of the British economy” if the UK leaves the EU without a deal.
He said it would lead to lower growth, higher unemployment and higher prices. But as he promised £100m for the police to fight knife crime and £3bn to build affordable homes, Hammond ignored calls to end a further freeze on benefits from April that will save the government £1.8bn.
Instead he is using most of the extra funds to cut the annual deficit, which the Office for Budget Responsibility, the Treasury’s independent forecaster, said would fall to 1.1% of GDP this year and to 0.5% of GDP in 2023/24.
Forecasts by the OBR for higher tax receipts, especially from higher earners, and a cut in the cost of government borrowing over the next five years were the main factors behind an increase in the government’s spending envelope to £26.6bn, from the £15.4bn forecast last year.
Hammond said a Brexit dividend would be used to improve public services, increase spending on public infrastructure, cut taxes or reduce government debt.
His reluctance to boost spending ahead of a comprehensive spending review was welcomed by the Institute for Fiscal Studies thinktank. Its director, Paul Johnson, said it would be irresponsible to open the Treasury’s wallet before the Brexit debate had reached a conclusion.
Johnson’s view was not shared by the shadow chancellor, John McDonnell, who said the chancellor’s reticence was in line with 10 years of austerity, which punished the poorest in society.
“When the chancellor stands there and says that the end of austerity is in sight, talks of a plan for a brighter future – how can anyone who has lived through the last nine years believe him?” McDonnell said.
“This is a government that has demonstrated a chilling ability to completely disregard the suffering they have caused. To talk of changing direction after nine years in office is not only impossible to believe, it’s also much too late.”
The Liberal Democrat leader, Vince Cable, accused Hammond of sitting on his hands while public services coped with funding cuts. “Despite continuing austerity for most government departments and a violence epidemic on our streets, the chancellor announced no meaningful new funding and failed to even confirm a date for the crucial upcoming spending review.
“In truth, the only real ‘dividend’ on offer is that from remaining in the EU by giving the public a people’s vote on Brexit,” he said.
Carys Roberts, a senior economist at the IPPR thinktank, said: “The baby steps and half-measures announced in the spring statement are wholly inadequate to fix the fundamental weaknesses in the UK’s economic model.”
Britain’s economy is expected to expand over the next five years, according to the OBR, and the UK will create another 600,00 new jobs by 2023. The OBR has also revised up its wage growth forecasts, to at least 3% each year.
Torsten Bell, director of the Resolution Foundation thinktank, said: “The chancellor’s £26bn of fiscal firepower is more than enough to bring austerity to an end in the spending review later this year. This marks a major shift as the debate in British politics moves to focusing on how much more we should spend, rather than how deeply to cut.
“But despite improvements to the public finances, driven in part by particularly fast earnings growth for high earners, austerity will continue for just-about-managing families, who face a £1.8bn hit from the benefit freeze in just three weeks’ time.”
