How should we think about Chancellor Phillip Hammond’s Budget? His job is a bit like that of someone who’s doubling up as both the captain and the cabin crew of the economic aeroplane in which we are all flying. He has to fly us safely to our destination, but also to attend to all our divergent—and often incompatible—needs and interests. If he gets the balance wrong we will either be angry, or possibly not arrive safely at all. To complicate matters, he also knows there’s a huge storm ahead called Brexit, and he has a particularly unruly group of colleagues who think the storm is a figment of his glum imagination.
In the event, Hammond was more cheerful than he might have been, and looks to have avoided the banana skins that tripped him up earlier this year, also known as tax reforms. (Purely economically speaking, these are badly needed, but can be near-impossible to pull off politically). His speech included an introduction and conclusion that were long on hyperbole, and the middle sections didn’t really add up. But let’s look at the big picture: the safety of the flight, the storm ahead—and then what Hammond did for individual groups and constituencies.
The macro picture is pretty simple. It’s a lot worse than the Chancellor or the rest of us thought. This wasn’t a total surprise because the Office for Budget Responsibility (OBR) had already warned that it would make a major change to forecasts for productivity growth, which it no longer thinks will revert to the pre-financial crisis trend. The UK’s trend growth rate is now thought to be around 1.6 per cent per annum, compared with a previous estimate of 2.5 per cent. Take off population growth of about 0.7 per cent a year, and you can see that in income per head terms, living standards measured this way are pretty stagnant. The OBR expects growth to fail to even get to 1.6 per cent until 2022.
This rather sombre growth outlook leaves us with less leeway to absorb shocks, domestic or external. And it means that the Bank of England is going to have to be especially careful in determining the path of interest rates. Weaker trend growth in the economy might mean the Bank having to raise rates to fend off inflation, but weaker demand growth might call for the opposite.
The disappointing growth forecasts are bad news for three other reasons. First, they come at a time when the European Union and many others are revising their own GDP expectations up. Second, the government is talking about the UK being on the cusp of a technological breakthrough, but at the same time telling us that productivity growth is much lower than previously assumed. This doesn’t add up. Third, the weaker growth means that public borrowing will be higher than we thought for the next few years. The so-called structural, or cyclically-adjusted, deficit is predicted to be higher as a percentage of GDP in every year out to the early 2020s.
"The macro picture is pretty simple. It’s a lot worse than the Chancellor or the rest of us thought"One of the important consequences of this is that the amount available for spending rises or tax cuts, which was previously thought to be £26 billion, is much smaller. The Chancellor’s wiggle room now is just 0.5 per cent of GDP, rather than about 1 per cent. That amount is £14.8 billion. It might still seem like a lot, but it could be eaten up quickly by an economic downturn or any negative consequences of Brexit.
Looking at other details, the news was a bit more cheery. There was a refreshing focus on new industries and regional growth. There will be additional spending on R&D, the National Productivity Investment Fund and British Business Bank, a boost for maths and computer science teaching, a higher minimum wage, and new measures to get multinational digital businesses to pay income tax on royalties remitted to low or no-tax jurisdictions.
There will be more money for the NHS in this parliament, for capital spending, for current spending and perhaps for nurses’ pay. The amounts don’t match what the NHS wants, but it would be churlish to deny that more funding is welcome. There were several announcements about capital allocations, loans and guarantees to boost house building and ease planning constraints, which will take time to decipher and assess. They may help at the margin, but it’s hard to imagine a bold new housebuilding programme without local authorities being more active. Stamp duty for first time buyers up to £300,000 was abolished, which will be good for them, but won’t make housing more affordable or available necessarily.
In due course, we will all be able to assess the Budget and judge the extent to which it addresses the needs in the UK today. Yet, as a statement of the country’s preparedness for Brexit, and its capacity to mitigate the macroeconomic consequences, it fell short.
The government needs to be bolder in dealing with things like income/wealth redistribution, productivity growth, entrepreneurship and investment, housing, and health and social care. But it has enough on its plate trying to maintain a sense of order. Being bold calls for a strength of purpose and leadership that it doesn’t have.
