The chancellor fails to enumerate home truths about Brexitby Paul Wallace / October 1, 2018 / Leave a comment
In the civil war that is today’s Tory party, Philip Hammond represents the dour Roundheads doing battle with the swashbuckling Cavaliers reborn as hard Brexiters. In government, the chancellor of the exchequer is the reality check to the castles they keep on building in the air. Disappointingly, he missed an opportunity today to inject some sense into the Conservative Party conference in Birmingham.
Hammond did give strong support to Theresa May’s beleaguered Chequers plan, which is dismissed by hardline Brexiters such as Boris Johnson, saying that “we must stand four-square behind the prime minister.” The chancellor explained why the plan’s goal to retain as close as possible a relationship with the EU in goods is essential. Britain’s manufacturing and retailing economy has become tightly integrated with Europe following 45 years of membership. He pointed to the intricate supply chains that link Britain with Europe and the many thousands of lorries passing through Dover and the Channel Tunnel each day. And he stressed that the Chequers plan would avoid a hard border in Ireland.
However, Hammond failed to set out how and why a no-deal Brexit would be calamitous for the economy. Given the damage it would create, his promise to maintain enough “fiscal firepower” to support the economy in such a dire event offered scant comfort. And he was disingenuous in highlighting a “deal dividend” in higher growth and better public finances following a successful conclusion to the negotiations between Britain and the EU, assuming that such an agreement can be pushed through parliament. Any such “dividend” would no more than partially compensate for the setback to growth arising from the Brexit-induced uncertainties.
Hammond could usefully have spelt out the damage that has already occurred since the referendum in June 2016. Even though the economy avoided an immediate recession, it has performed much worse as a result. According to the Centre for European Reform, a think tank, GDP is now 2.5 per cent smaller than it would have been if the vote had gone the other way.
The chancellor could also have set out the implications for the public finances. Since GDP is the tax base yielding about 40 per cent in revenues, such a shortfall in growth means a loss of revenue amounting to around 1 per cent of GDP. Armed with that lost revenue, Hammond would now be in a much stronger position when he presents his budget at the end of October.
In particular, the chancellor would be able to finance Theresa May’s commitment to spend more on the National Health Service over the next five years. Compared with previous plans, that decision for the NHS in England will increase health spending throughout the UK by 0.9 per cent of GDP in 2022-23, according to the Office for Budget Responsibility (OBR), the fiscal watchdog.
Shorn of the higher growth and real fiscal dividend that staying in the EU would have produced, the chancellor will be hard-pressed to finance not just the higher spending on health but the demands of other vital public services. The pressures to relieve the prolonged squeeze on departmental budgets are widespread. The effects are being felt for example in overcrowded prisons, undermanned police forces, inadequate social care and underfunded further-education colleges.
Making matters trickier for the chancellor, what the OBR calls the “fiscal illusion” produced by the current flawed accounting for student loans is likely to be dispelled before long. A reform could increase borrowing in 2020-21 by around 0.7 per cent of GDP. That’s about the same as the safety margin by which the Treasury reckons it is meeting its target of keeping the cyclically-adjusted overall deficit below 2 per cent of GDP for that year.
A chancellor determined to deliver a reality check to the Tories would have come clean about the fiscal costs to Brexit, which will mean higher taxes. That would at least match the public mood. Recent polling by NatCen for its annual survey of British Social Attitudes showed that 60 per cent of the population now favour higher spending and taxes. That’s double the share when the Conservatives regained office in 2010, and the highest proportion for 15 years.
Instead of laying down the tablets about Brexit, Hammond devoted only the bare minimum of his speech to it. Much of his address consisted of bland pieties about how the Conservatives would guide a post-Brexit Britain through sweeping technological changes driven by advances in artificial intelligence and robotics. He attempted to rebuild relations with business, asserting that the Tories were listening to its concerns, but offered little concrete to assuage them. And there was of course an obligatory swipe at Jeremy Corbyn and John McDonnell and their espousal of “the failed and faded ideologies of socialism.”
At a fateful juncture in Britain’s future, Hammond’s speech fell short of what was needed. As keeper of the purse, he is the second most important minister in the government. Spreadsheet Phil had the chance to educate his party with some hard numbers. The fact that he flunked it may be because of a natural wariness, not least since he does not enjoy the full-hearted backing of the prime minister. More likely, it reflects his recognition that the Tory rank and file are in no mood to harbour regrets about Brexit.