08 Mar 2017

Slapstick Phil. The Chancellor skewers Labour with humour while keeping his policy powder dry

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The Chancellor started his address in the House of Commons this afternoon by reminding MPs that back in November he had pledged that this would be the last Spring Budget. Such was the seemingly incremental and modest nature of the measures that he then announced that some might suggest that he had in fact already abolished this fiscal statement. In keeping with his (very welcome) pledge to avoid surprises there was virtually nothing in his text that had not been already signalled. This at least meant, from the perspective of the BVCA Director General, that there were no policy rabbits out of a hat to which he had to respond. The downside was how to fill up 1,450 words of a BVCA Insight.

As if to anticipate such a situation, Philip Hammond, not notorious for his skills as a stand-up comic, decided to compensate for the absence of major new schemes in his Budget with an unanticipated set of rather effective one-liners at the expense of the Labour Party (my own favourite being a tart reference to the party opposite knowing more than most about driverless cars). This was less a case of the ‘Spreadsheet Phil’ of old as of a new ‘Slapstick Phil’ suddenly assuming centre stage.

That he could adopt such a tone tells us much about the state of British politics at the moment. A Cabinet that has a very slim majority in the Commons (and none at all as we have witnessed this week in the House of Lords) and an absolutely massive challenge in the form of the Brexit deliberations to come, is nonetheless full of confidence about its standing with the electorate, while a Shadow Cabinet that should be in a position to inflict some wounds on the Government has been reshuffled due to waves of resignations so many times that it would be kind to call it a B-Team (D-Team is more accurate). An incredible 80 different Labour MPs have been in the Shadow Cabinet since May 2015. This is more than the total number of Conservative MPs who sat in the Cabinet under Margaret Thatcher and John Major combined over a period that lasted for 18 years. This not politics as normal.

Once Mr Hammond started in earnest he noted the “continued resilience” of the UK economy which he observed had “confounded commentators”. He did not dwell on the fact that said commentators included himself, HM Treasury and the Office of Budget Responsibility (OBR), whose analysis is at the heart of his own forecasts.

In many ways, it was the updated OBR estimates, echoing the upgrading previously declared by the Bank of England, which were the principal feature of the entire Budget. Growth is now thought to be destined to be 2% in 2017/2018, which is a sharp rise from the 1.4% which the OBR had pencilled in a mere 15 weeks ago. That stronger performance plus a number of one-off accounting changes suggested that the budget deficit for 2017/2018 would be a relatively mild £58.3 billion for 2017/2018 (or 2.6% of GDP) and decline from there through to 2021/2022.

The OBR also indicated that inflation would peak at an average of 2.4% for the year ahead (which is not as high as many other economic institutions have predicated) and that real wages would continue to grow as they have for the past 27 months.

With that broadly encouraging back-drop, the Chancellor decided to ‘bank’ his savings on the deficit and produce a fiscally neutral package which combined a series of mostly small tax increases to increase revenue with a softer proposal for the revaluation of business rates (especially for pubs) and a notable but not vast increase in expenditure on social care. There were also valuable if somewhat vague promises to reduce the administrative burdens linked to the R&D Tax Credit and a new £300 million fund to support STEM subjects and new technology.

So, is all rosy then in the back garden of 11 Downing Street? Almost certainly not. This was a Budget in which Mr Hammond deliberately kept his powder dry for what will be the ‘real’ fiscal event of this year, his second Budget, which will be delivered in November or December when he knows more about the direction of the economy and once the Brexit negotiations are engaged in earnest.

The latest OBR forecasts are probably no more reliable than the previous ones

The OBR is a curious institution. Almost everyone agrees that an independent agency to provide economic projections is a ‘good thing’. Yet there has not been a single year since its inception in 2010 that the predictions made by the OBR 12 months earlier have been even close to spot on. The Chancellor is a shrewd enough soul to appreciate that if growth forecasts can shift as dramatically as they have done upwards in less than four months then they are equally capable of moving as sharply in the opposite direction on a similar timetable. This alone is a compelling argument for choosing a fiscally neutral blueprint now and biding his time until the Autumn Budget before acting further.

The blunt truth is that no one at the Treasury, the OBR or the Bank of England knows why there has not been a ‘Brexit effect’ (other than on the exchange rate) so far or whether or not any adverse impact (if there is to be one at all) is simply being deferred until after the triggering of Article 50 (although that appears unlikely) or at the moment when any ‘deal’ is finalised or when the UK has actually withdrawn from the European Union. For all of his bravado and his skewering of the Labour Party today, Mr Hammond understands that to a perhaps disturbing degree he is operating in the dark.

Even if the OBR forecasts are absolutely accurate, they are not especially encouraging

As long as the point of comparison for the UK economy is with the performance of other large (G7) countries than it appears to be doing well (second only to Germany in 2016 as the Chancellor noted), but if that contrast is with recent and longer-term historical numbers then matters appear different. While the OBR is asserting that growth in 2017/18 will be 2%, which if true would probably mean the UK was again second in the G7 in the next financial year but with the United States ahead this time, the contention after that is that growth will ease to 1.6% then 1.7% then 1.9% and back to 2.0%.

None of those numbers represent spectacular progress by historical standards. There is a very lively debate among economists as to what the ‘trend’ rate of growth in the UK is and has been but the consensus has been around a minimum of 2.0% annually and a maximum of 2.5% per annum. None of the forecasts being offered for the next five years are, therefore, above the minimum suggestion of the trend figure.

To that extent, the numbers, while better than some might have expected last year in the immediate aftermath of the referendum result, are not especially encouraging. They indicate that it will be a challenge to secure a budget surplus of substance by the end of the next Parliament (May 2025) when just a year ago it was official policy to reach that point by the close of this one. The additional logical conclusion is that it will be very tough to lower the debt to GDP ratio much below 75% by 2025, thus leaving it at a level which is twice as high as it was before the financial crisis. The mystery is how an economy which is by no means in its top gear is also at close to full employment.

The UK continues to have a fundamental productivity problem which may be very hard to resolve

The explanation for the above apparent dilemma rests in large part on low productivity. The UK has to employ more people to acquire the same equivalent output levels in the US, France and Germany. The Chancellor was, in fairness, very frank about this situation. If he had been even more candid, he could have mused that as immigration has been one of the few positive features in our productivity record, a stricter stance on migration after Brexit could make matters worse before they get better. So, the real test of whether he proves to be a transformative Chancellor is not if he can outperform Jeremy Corbyn in the House of Commons (Sooty could probably do that) but inspire UK productivity.

Tim Hames
Director General, BVCA


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