One of Philip Hammond’s early decisions was to make his spring statement play second fiddle to the Treasury’s main event of the year, the autumn budget.
Even the chancellor could not have expected his half-yearly update on the state of the economy to be as low key as it actually turned out to be, though. For the time being, all that really matters in UK politics is Brexit. There has been little or no appetite for the usual speculation about the tax or spending surprises the chancellor might announce.
That, in part, was due to the slightly unreal sight of the chancellor providing forecasts for the economy that have an even bigger margin for error than usual. The independent Office for Budget Responsibility, which does the number-crunching for Hammond, has assumed that the UK would leave the EU on 29 March on the basis of a withdrawal agreement that MPs have now heavily rejected twice. The OBR’s forecasts will be wrong. The only question is how wrong.
That’s not to say that the spring statement was a pointless exercise. There were some unexpected spending measures – from money for new homes to funds for the police to tackle knife crime – and a number of key messages, only some of which were overt.
Hammond was keen to get across the idea that the economy is fundamentally in good shape. Unemployment was down, 3.5m jobs had been created since 2010, wage growth was at its fastest in more than a decade and borrowing £130bn lower than in Labour’s last year in power.
Like every recent occupant of 11 Downing Street, the chancellor was selective in his use of statistics. There was no mention of the four consecutive quarters of falling investment, nor that the post-referendum fall in the value of the pound has made little difference to the UK’s huge trade deficit.
Yes, it is true that the economy has performed much better than Hammond’s predecessor George Osborne said it would. Yes, the slowdown in growth in the UK is part of a global trend. But the economy has never recovered from the financial crisis of a decade ago. Productivity is poor, growth remains overreliant on consumer spending and the housing market. Growth averaged more than 2% a year in the decade up to 2008. The new normal is 1.5%.
Hammond’s second message was that a no-deal Brexit would cause significant damage to the economy, which he would seek to mitigate through an emergency package of tax and spending measures. In this respect, the chancellor provided a more realistic insight into the possible policy response than that provided by Mark Carney at the Bank of England.
Carney has said interest rates could go either up or down in the event of a no-deal Brexit, depending on whether the bigger impact was on growth or inflation. Hammond said the Treasury and the Bank had all the tools available to them. He would act to boost growth, and would expect Carney to do the same.
Hammond said he remained confident there would be a deal that would lead to increased business confidence, the unleashing of investment that has been mothballed and a spurt in growth. Lifting the “cloud of uncertainty” would lead to a deal dividend.
The message here could not have been clearer. Even though growth has recently been weaker than predicted in the budget last October, the public finances have come in better than expected. The chancellor is obliged by his own fiscal rules to reduce the size of the government’s budget deficit adjusted for the state of the economic cycle to below 2% of GDP by 2020-21, and he is on course to do so even more comfortably than was the case in the autumn.
The OBR calculated six months ago that he would have about £15bn to play with, but it has now upped that figure to £27bn. Almost half of that could disappear because of planned changes in the accounting treatment of student loans to reflect that many of them are not paid off, but even so the chancellor has a war chest that he expects to get bigger in the event of a deal being done.
This year’s budget will be combined with a comprehensive spending review and much could go wrong between now and then. But that is the moment when Hammond, assuming he is still chancellor, plans to spend at least some of his “deal dividend” and announce the end of austerity.
For the poor this might ring a little hollow. The chancellor’s list of priorities – increased spending on public services, higher infrastructure spending, lower taxes and debt reduction – does not include easing the pain of welfare cuts.
