Philip Hammond's budget is a long way from tackling future challenges
|
Version 0 of 1. Philip Hammond’s budget marks the end of the Brexit phoney war. As in the spring of 1940, there has been a protracted period since 23 June when there have been a few skirmishes but life has gone on much as before. The chancellor knows that the eerily calm conditions of late 2016 are quite likely to end, which was why the unspoken thrust of his package was to make the UK economy ready for life outside the European Union. Not that it was possible to detect any concern from Hammond’s speech, in which he managed to channel his inner Basil Fawlty by making only a glancing reference to the result of the referendum. It was a case of “don’t mention the Brexit. I mentioned it once but I think I got away with it.” Instead, Hammond cantered through measures that had been well aired in recent days. There was extra money for schools and vocational education; some help for companies adversely affected by the new business rates regime; £2bn over the next three years for social care; and a shake-up of national insurance contributions that will result in higher tax for the self-employed. This last change, while perfectly defensible, may well come back to haunt the chancellor: his tax on white van man to mirror George Osborne’s pasty tax. The low-key nature of the budget was deliberate. Chancellors only embark on major giveaways during the mid-term of a parliament for one of three reasons: they are awash with cash and need to run down a budget surplus; the economy is in recession and needs stimulating; or the government is planning a snap election. None of those conditions currently apply. Borrowing has been revised down sharply for the current financial year, but the Treasury will still need almost £52bn to balance the books. Austerity will continue into a second decade on current projections. As Hammond noted, the resilience of the economy has confounded most – if not all – commentators. The economy grew a little less rapidly in 2016 than the independent Office for Budget Responsibility expected when it last reported in November, but that was because activity in the pre-referendum period was weaker than previously thought. Growth since the Brexit vote has been stronger than the OBR envisaged and the momentum from late 2016 has continued into early 2017. But the OBR thinks the stronger performance of the economy is the result of growth being brought forward from the future. Activity in the years after 2017 has been revised down. There are some Conservatives who think this is the perfect time for a snap election. The government has a commanding lead in the polls, the economy is about to go through a soft patch, and nobody knows what impact the Brexit talks will have. This, though, was not a snap election budget. It was the dry run for a rather more substantial affair later in the year. From Hammond’s perspective, that makes sense. He has abolished the traditional spring budget in favour of the autumn so he had an incentive to save up the big announcements for later in the year. Hence, the willingness to wait for the results of all the policy reviews and green papers mentioned in the speech. What’s more, the Treasury believes that by the autumn it will have a clearer indication of where the economy is heading. Part of the uncertainty is due to Brexit but not all of it. Real incomes were always going to be squeezed this year by welfare cuts, pay restraint in the public sector and the rising inflation caused by the bounce back in oil prices. The depreciation of the pound that followed the referendum has made the squeeze on living standards more acute. Despite all the talk about help for the “just about managing”, struggling families are going to find life even harder in the years ahead. As Andrew Harrop, general secretary of the Fabian Society, has pointed out, real spending on non-pension social security will fall 6% by 2021, which will translate into lower living standards and less spending power for families. “As a share of GDP welfare spending will fall to the lowest level since 1991, excluding the state pension and support for the unemployed, undoing all the good work new Labour did to tackle child poverty,” Harrop added. The OBR is actually taking a relatively benign view of the outlook for inflation, which it sees averaging 2.4% in 2017 and 2.3% next year. Faster increases in the cost of living, which look quite possible, would lead to a bigger hit on living standards, lower consumer spending, weaker growth and higher borrowing. There were a few curious omissions. In the autumn statement, Hammond said the shortage of affordable homes was a barrier to productivity growth, yet there was not a single mention of housing in the speech. Nor does the environment appear to feature high on his list of concerns given the lack of any immediate measures to reduce the use of diesel cars. Carolyn Fairbairn, the director-general of the CBI, hailed the announcements on technical education as a “genuine breakthrough” that would help the economy adapt to the demands of the fourth industrial revolution. “Whatever happens with Brexit we know we have to get the economy into a strong competitive position,” she said. That’s a fair assessment. Brexit or no Brexit, the UK economy displays some serious structural weaknesses that need fixing. Productivity is one. A comprehensive skills strategy is another. Poor infrastructure is a third. Employer investment in training, according to the Institute for Public Policy Research thinktank, has fallen by more than £5bn since 2010-11, which puts the extra £500m promised for technical education from 2019-20 into perspective. As in the late 1930s, the government has belatedly woken up to the challenges ahead. It wants to put the economy on a war footing. It is a long way from doing so. |