No Surprises: Hammond sets out a very different fiscal course in a low-key fashion

The ‘Autumn Statement’ has a curious history to it. For many years, the UK had a fiscal process in which there was an annual Budget, usually held in March, which focused very much on taxation but which might set out a total for public expenditure in the year or years to come but leave the details of that spending silent. They would only be established at a different financial event held later in the year, invariably October or November, and hence the Autumn Statement. Separating taxation and spending in this manner was never especially logical (and led to an annual summer fight within the Cabinet over resources) and for a brief period in the mid-1990s Ken Clarke, as Chancellor, ended the divide by fusing the two in to one Budget statement to be held not in the Spring but in the Autumn.
Whether out of nostalgia for traditional arrangements this was never a very popular arrangement. When Labour assumed office in 1997, Gordon Brown kept tax and spending together but moved the unified Budget back to where it had been (invariably March) in the calendar. For reasons that were never really convincingly articulated, though, he also retained the notion of an Autumn Statement but as a ‘Green Budget’ at which the Treasury would test out ideas for future policies.
It did not take long for this quasi-academic exercise to become a de facto second Budget if it suited ministers to use it either to adjust policy proposals or to introduce new measures or simply capture the headlines. Mr Brown certainly saw the value of such an approach. Alistair Darling, his successor, was by instinct far more sceptical about the virtues of the Autumn Statement as a top-tier political event (despite this, dire circumstances often obliged him to satisfy the media circus with new announcements). George Osborne was squarely with Mr Brown in also considering the Autumn Statement to be an additional Budget if that was convenient for him, for example, recasting stamp duty on houses entirely in 2014.
Philip Hammond will not have approached the Autumn Statement that he has just delivered with the wish to let off fireworks. Indeed, he is not the sort for fireworks on 5 November, never mind on the 23rd. His personal and political objectives in his deliberately subdued speech to MPs were as follows:
First, to set out a different fiscal framework from his predecessor and one which allows him much more flexibility in responding to what are the wildly unpredictable potential consequences of Brexit. Mr Osborne had committed himself to achieving a surplus of current revenues over both current and capital expenditure by the end of this Parliament (2019-2020). This was his much vaunted “long-term economic plan” even if technically it was his second version of a long-term economic plan as the original model, which foresaw a balanced budget by the end of the last Parliament, had to be recalibrated (in more blunt terms, abandoned) at the Autumn Statement held at the end of 2012. Mr Hammond’s central task was to bury the latest long-term plan in favour of a shorter-term strategy.
Second, Mr Hammond, urged on by Theresa May, wanted to signal different fiscal priorities to the Cameron/Osborne era. The old regime had tended to target their measures at the entrepreneurial rich via various tax initiatives but also at the working poor through taking ever larger numbers of them out of income tax altogether and more recently the introduction of the National Living Wage. The new occupant of 10 Downing Street does not necessarily object in principle to any of this but manifestly believes that what might be described as either the upper working classes or the lowest ranks of the middle class (the JAMs – Just About Managing) need to sense more official affection. On spending, the post-Cameron leadership has somewhat more enthusiasm for directing public money towards bread-and-butter or meat-and-potatoes infrastructure schemes rather than grand projects.
Finally, the Chancellor wanted to establish a different role and style for the Treasury in Whitehall. Under Mr Osborne it had been viewed as interfering everywhere, cutting across the Department for Work and Pensions, the old BIS, even the Department for Education. Mr Hammond wants a more collegial relationship with other Cabinet members and to encourage a culture of consultation with outside interests rather than sudden surprises. Partly this is a matter of temperament but it is also an approach which will make it easier to solicit support from colleagues on the Brexit negotiations.
With these ambitions in mind, what Mr Hammond outlined this afternoon has a solid rationale to it.
The new fiscal framework. The Office of Budget Responsibility has been comparatively kind to the Treasury. It has lowered growth forecasts but not to the extent that it might easily have done. It is predicting growth of 1.4% in 2017 and 1.7% in 2018 before a return to a level of growth similar to that seen this year. An adjustment of this sort did not demand dramatic action by Mr Hammond. He has instead established three new economic ‘rules’. They are: (1) that the public finances should be balanced as soon as possible in the next Parliament with cyclically adjusted borrowing below 2% by 2019/2020; (2) that the ratio of public sector net debt to GDP should be falling by the end of this Parliament and (3) that welfare spending should be capped subject to OBR oversight. Absent a much stronger Brexit shock than expected or a serious international economic slowdown, this is a set of conditions which the Chancellor should be able to meet rather than have to revise once again.
A new set of priorities. Although the amounts of money involved are not spectacular, the Chancellor made an important adjustment of principle and in priorities by choosing to fund additional spending on infrastructure and innovation out of higher borrowing, not by increasing existing tax revenues or cutting other spending further to accommodate them. The boost to research and development, his collection of small but potentially high-impact road and rail schemes, and an emphasis on improving digital and broadband connections will doubtless be widely welcomed. In a similar spirit, the extra £400 million for venture capital funds to be delivered via the British Business Bank may well prove a down payment in advance of additional support once the Patient Capital Review has been finished and is a hint that ministers are preparing for the BBB to take on a more extensive role once Article 50 has been triggered and the European Investment Fund starts to run down its UK activities. What scant largess Mr Hammond had left to spare was indeed directed at the JAMs (even if thinly spread).
A new relationship between the Treasury and other departments. Although it would have been missed by almost everyone who does not work within Whitehall, Mr Hammond’s concession that departments which succeed in meeting and exceeding their targets for spending restraint will be able to retain a modest proportion of that extra underspending rather than have to return it all to the Treasury will be viewed within the senior civil service as a marked change in approach and tone.
A new role for the Autumn Statement and future Budgets
It is a reflection on how different this Chancellor is from his immediate predecessor that his final announcement – normally the ‘rabbit from a hat’ moment in such speeches – was to declare that this would be his first and last Autumn Statement. After the Spring Budget next year, the Budget will return to where it was before Mr Brown ended Mr Clarke’s short-lived experiment and be delivered in November/December with the measures set out invariably not implemented until the next April. As the OBR is legally obliged to issue projections twice a year, there would be a Spring Statement in future but Mr Hammond pledged this would just be a formal response and not a major fiscal event (although he reserved the right to introduce measures in it in truly exceptional circumstances). So is the system which allowed for two Budgets in a year finally ended? I hope so, but would not bet on it.
Tim Hames, Director General, BVCA