Listen to this article
This is an experimental feature.
Give us your feedback.
Thank you for your feedback.
What do you think?
Philip Hammond had two overriding aims as he stood up to deliver his Budget. First, to explain how he would equip Britain for a future outside the EU — in the context of immense uncertainty and the worst downgrades to the UK’s economic prospects since the financial crisis. Second, to ensure his own political survival, in the face of Conservative colleagues calling for “revolutionary” action while hoping he would trip up. The chancellor has done a reasonable job of tackling some of the most urgent issues, given the fiscal and political constraints.
It is hard to overstate the significance of the Office for Budget Responsibility’s bleak forecasts. It expects growth to average just 1.4 per cent a year over the next five years, chiefly due to a fundamental reassessment of the UK’s productivity performance. For years, the OBR assumed productivity growth would return to its pre-crisis trend. Its new forecasts reflect a dismal reality. The OBR now thinks the UK economy can only grow sustainably at a rate of 1.5 per cent, more than a third lower than it estimated two years ago. This has big implications for living standards and for the public finances.
Although borrowing has been lower than expected this year, the OBR revised up its forecasts for the budget deficit in succeeding years. Mr Hammond nonetheless chose to deliver what the OBR terms a “significant near-term fiscal giveaway”. He met his fiscal rules by fresh sales of state-owned assets, by accounting changes, and by pencilling in unspecific spending cuts in later years.
The giveaway remains modest, though, and Mr Hammond’s challenge was to identify where relatively small amounts of money could do most to boost productivity. The areas he has chosen to target are sensible ones.
The most significant new spending is on housing — where a chronic shortage in supply has long been a barrier to labour mobility and a cause of widening generational inequality. The crowd-pleasing measure is Mr Hammond’s abolition of stamp duty for most first-time buyers. This is designed to appeal to the young professionals who deserted the Tories at the last election — even though it will largely benefit house owners, who will be able to raise selling prices. More important, however, is the £44bn package of investment, loans and guarantees to boost housebuilding. This is spread across various funds, and much will depend on the detail. But the ambition is clear — as is the threat of government intervention, if private developers are found to be hoarding land in order to maximise profits.
Mr Hammond also deserves credit for a swath of smaller-scale interventions to reinforce the UK’s existing strength in science and high-tech innovation. These range from an increase in R&D tax credits, to more money for schools to hire computer science teachers, to a big push to train maths teachers and increase the subject’s take-up at A level. No one measure will be transformative, but the overarching strategy — to back a sector in which the UK could hope to remain internationally competitive after Brexit — is surely the right one.
Mr Hammond also acknowledged the need to ease strains on health services and on the finances of poorer households. But the extra money he made available immediately for the National Heath Service was probably the bare minimum required to avert a winter crisis. There was no mention of social care, despite the acute funding pressures. Changes to smooth the implementation of universal credit will fix the most flagrant design flaws in the new welfare system — but do not alter the fact that benefits have become less generous.
When it came to tax, Mr Hammond was careful not to provoke powerful interest groups — alluding himself to the fiasco over his earlier attempt to raise taxes on “white van man”. The few tax increases were aimed at relatively soft targets: diesel cars; second homeowners who face a doubling of council tax on empty properties; and the tax avoidance strategies practised by multinationals such as Apple and Amazon. He refrained from measures that might have been sensible but unpopular, such as defer the planned cuts to corporation tax; or lowering the VAT threshold for small businesses.
This caution is notable. Chancellors usually spend political capital early in the electoral cycle. This government has a tiny majority and is flying near blind when it comes to the outcome of the Brexit negotiations and the UK’s future relationship with the EU.
Mr Hammond is in no position to take risks. He was in the uncomfortable position of a chief executive who would like to get all of the bad news out of the way, and begin the task of turnround — but who knows that more bad news may well be round the corner. Mr Hammond has now spent about half of the funds he set aside as a Brexit war chest. He will have little in reserve.