The main point of the budget was to avoid the real question marks looming over the UK’s economic prospects—Brexit and demographic strainsby Jonathan Portes / October 29, 2018 / Leave a comment
Photo: Claire Doherty/SIPA USA/PA Images The relatively healthy state of the UK public finances is a mixed blessing for Philip Hammond and the Treasury. While Brexit has—as the OBR and other credible independent forecasters have shown—depressed growth, the impact on the public finances has largely been offset by unexpected strength in employment growth and unforeseen underspends in the public sector. The chancellor has essentially spent all of this windfall gain of £15bn a year or so—enabling him to claim that “austerity is coming to an end.” Hardly: the extra money will certainly slow the rapid deterioration in public services from health to social care to policing that has become apparent to almost everybody in the last few years. But it won’t reverse it. More fundamentally, this temporary boost doesn’t deal with the underlying issue which British governments, especially Conservative ones, have been grappling with for at least three decades. The British public wants, broadly, Scandinavian levels of provision for public services, and does not like it when governments (as with the Conservatives in the 1990s, and more recently over the last eight years) start heading in a more American direction; equally, however, they (or at least the electoral base of the Conservative Party) much prefer American levels of taxation. Demographic pressures will only heighten this tension. Today’s Budget does absolutely nothing to resolve it. For now—but only for now—the chancellor has dodged the question, putting it off to next year’s Spending Review. So today’s Budget is largely a holding operation. There is the usual mix of reannouncements of large amounts of money already allocated (£25bn for roads, and the extra funds for the NHS) and “lollipops,” as the Treasury refers to eye-catching announcements that cost very little (a 50p coin to celebrate Brexit is as good as it gets in this department). But there are some real new spending commitments, for example on the armed forces and business rates. In the short term, the decision that will have the most impact on households is Hammond’s decision to restore most of George Osborne’s cuts to Universal Credit, as well as to make some changes to the operation of this ill-conceived and disastrously implemented benefit. This U-turn should be welcomed—dare I say, universally—although it is an illustration of just how short-term and amateurish policy-making has become under the pressure of Brexit that this was cobbled together at the very last moment, and the OBR was unable to check the arithmetic properly. But the main point of the Budget is to dodge the real question mark over the UK’s short and medium-term economic prospects—Brexit. Again, the OBR has helped, by saying that the outcome of Brexit is so uncertain that at this point they can’t say anything further useful about its economic and fiscal impacts, so it doesn’t show up in the numbers. We know that, like almost all credible economists, the chancellor regards Brexit as, from an economic perspective, a damage limitation exercise, with the downsides minimised by the softest possible Brexit and, if at all possible, remaining in the customs union and the single market, de facto if not de jure. To his credit, the chancellor said about as much as he reasonably could on the government’s strategy in the case of a no deal Brexit. As he made clear on the Andrew Marr Show, this will be the exact opposite of George Osborne’s. Osborne promised what was described as a “punishment Budget”—tax rises and spending cuts—in the event of a Leave vote. As I and others from all sides pointed out at the time, this was economically illiterate as well as politically maladroit. Hammond has said the exact opposite, making clear he’d let borrowing take the strain of what would undoubtedly be a huge economic shock. The government’s belated conversion to elementary macroeconomics is very welcome. Let’s hope it doesn’t actually get put to the test.