Philing In. The Chancellor had to deliver his Budget in very strange and uncertain circumstances

This is not how Philip Hammond had expected the 2018 Budget to occur. Almost two years ago, the Chancellor announced that he intended to end the process, started under Gordon Brown and then extended by George Osborne, by which the UK, uniquely in the developed world, held both a formal Budget (normally in March) and then what was variously known as an Autumn Statement or ‘Green Budget’ or ‘Pre-Budget Report’ (usually in November), which also contained announcements that resembled those of a national Budget. Mr Hammond said that after a transition year in 2017, there would only be one major fiscal occasion in any calendar year (logically, by implication, in November).
The theory of all this was widely welcomed. The practice has been somewhat more challenging. Three factors obliged Mr Hammond to deliver a Budget in strange and uncertain circumstances.
The first and most important of these relate to Brexit. Concerns about maintaining the space in the parliamentary timetable for a Brexit deal, if struck as was once hoped (and perhaps may still be witnessed) by mid-November, meant that the Chancellor was compelled to hold his Budget at least three weeks earlier than he might have expected before the summer recess, and hence his words today were something of a rush job.
More awkwardly, however, the OBR was forced to submit its projections for the economy - which have enormous influence over any modern Chancellor’s ‘wiggle room’ - without any certainty over precisely how the UK would exit the European Union next March. The somewhat ad hoc solution to this dilemma was that the OBR should assume that an orderly Brexit on the anticipated timetable would come to pass and that at some point after that a ‘fairly standard’ free trade deal between the UK and the EU would be agreed, and use that as the basis for coming up with its numbers. If, on the other hand, Brexit bombed next year, Mr Hammond mused yesterday, he would hold another Budget. As a formula for economic analysis, this is surely rather less than ideal.
The second element is the economy itself, which has had a somewhat confusing year so far. The UK had ended 2017 in seemingly robust health, with both the OBR and the Bank of England raising their expectations for the 12 months to come. The first quarter of 2018 was, though, disappointing, but it was unclear how much this was due to adverse weather (the ‘beast from the east’ notably). Q2 was better but nothing to be wildly excited about, while Q3, by contrast, was notably stronger, although once again the climate (this time unusually benign) plus an unexpected England World Cup run were put in the frame as potentially rogue factors. How Q4 will fare is thus hard to tell (ask the Met Office?) which cannot have made the task for the poor souls who are the OBR High Command much easier.
To compound the head-scratching there, the slightly odd state of affairs appears to be that while growth is (on the headline numbers, anyway) uninspiring, there is clear evidence of an investment slowdown and sections of the High Street that rely on consumer spending are being clobbered, at the same time unemployment is extremely low, tax receipts are up and the deficit is moving down. Inflation, while above target, is not a menace and an interest rate surge is unlikely. Figure that out.
The final burden for the Chancellor is the fragile, at times febrile, state of the Government overall. This meant that a very important spending decision involving the NHS was made back In late June, with huge implications for all the rest of his calculations, because of a perceived political imperative to offer the Health Service a 70th birthday present.
Furthermore, as part of the wider effort to shore up the Prime Minister at the Conservative Party conference, a set of Budget-like decisions (such as extending the freeze on fuel duty) were made leaving the cupboard somewhat empty for poor Mr Hammond himself.
In a final twist, Theresa May informed the party faithful in Birmingham that the end of austerity was imminent. This may have been a surprise to quite a few senior officials and ministers at the Treasury. All told, that we have had a Budget delivered today is a minor miracle.
So what have we actually learnt from what has been one of the strangest Budgets of recent times?
Austerity might or might not be ending, but Osbornomics is definitely dead
The Chancellor echoed the Prime Minister in asserting that the “era of austerity” is “finally coming to an end”. That act of termination will not be fully embraced until a spending review is completed next year. The line of travel that settlement will involve was, nonetheless, established, in that Mr Hammond declared that the next five year overall departmental expenditure figure would see an average annual real growth of 1.2% in contrast to the reductions in the same total of 3% which were introduced between 2010-2015 and 1.3% in 2015-2020. That this is a change of direction allowed the Chancellor to pronounce that austerity was ending. The fact that it merely (and incompletely) makes up for the second wave of public spending cuts permitted the Labour leadership to disagree.
The real policy shift here is actually not the easing of austerity as such but the last nail in the coffin of the economic approach that George Osborne had set out in the run-up to the 2015 election and even more forcefully once the Conservatives had secured their unexpected majority in May 2015. It was the dictum then that the budget should be in overall surplus by 2020 and that further years of surpluses would be required to make a serious dent in the vast increase in the national debt that has occurred since the financial crisis of 2008.
Tax cuts would, therefore, come from spending restraint. Mr Hammond is making no attempt to achieve a surplus by 2020. He is content to allow borrowing to continue at a rate around 1% of GDP for at least three years after that. His new metric for success is emphatically a decline in the ratio of debt to GDP on a sustained basis. Furthermore, he brought forward the tax cuts promised by 2020 in 2015 to 2019 but has paid for them by higher borrowing.
The Government is seeking to balance more populism with a closer relationship with business
The first year after Mrs May entered 10 Downing Street were at times confusing and dispiriting for many in business. Her then guru, Nick Timothy, appeared to have a hostile attitude towards large companies in particular and seemed to think that being seen to ‘stand up’ to the business sector was an essential component of a post-financial crisis populism that the Tories needed to adapt to. The June 2017 election result disposed of him but left behind the sense that the Conservative Party was so shell-shocked by the success of Jeremy Corbyn that it might wish to move into his territory.
The mood music (and policy substance) has moved on. There were plenty of measures put forward by the Chancellor today that are clearly intended to be popular such as extra money for schools, a further bailout of Universal Credit and new funds to improve access to the housing market. He also set out some extraordinary micro-proposals ranging from air ambulances to church halls to public lavatories. He not only froze fuel duty but also did not increase the taxes levied on beer and scotch. He did his best to minimise the areas where Labour could accuse him of inaction and indifference. Allowing for the hand that he had been dealt, this was a politically shrewd series of initiatives.
But this time business was not left out of the equation. There was a substantial increase in the Annual Investment Allowance. His pledge to cut the business rates imposed on small businesses by one-third will be widely cheered, as will some admittedly short-term wheezes to assist those who are struggling to make ends meet on the High Street. He was at pains to insist that a UK Digital Services Tax would not be targeted at start-up or scale-up tech companies.
He also set aside another £200 million for the British Business Bank next year explicitly to deal with the gap left as the EIF effectively withdraws from these shores. This last measure has been a particular BVCA priority.
Yet so much still depends on Brexit
The Chancellor was at times so breezy at the dispatch box this afternoon that it appeared that he might have forgotten about the UK’s impending exit from the European Union. In truth, he is all too aware that the credibility of his approach, and of the numbers which the OBR have predicted, will be fundamentally at the mercy of whether or not the UK can depart from the EU in an orderly manner next March and after that whether it can do better or worse than reach a standard free trade deal with the EU-27.
If the ultimate result is at the better end of the spectrum then the growth figures published this afternoon could prove pessimistic. A badly botched Brexit would make them look like the height of optimism and could lead whoever is Chancellor in 2019 to revise all of these numbers.
Tim Hames
Director General, BVCA