Since the general election, Philip Hammond has emerged as one of the voices of sanity in Theresa May’s fractious and weak government. The chancellor of the exchequer took the lead in urging a softer approach to Brexit, in particular by seeking a transition period after Britain leaves the EU in March 2019, which broadly preserves the status quo. His efforts bore fruit in May’s speech in Florence ten days ago, which did something to unblock the stalled negotiations in Brussels between Britain and the EU even if her proposal of around two years was shorter than advisable.
That makes it all the more disappointing that Hammond failed to use his speech today at the Conservative conference in Manchester to spell out some home truths to the party faithful about the impact of Brexit on the economy. Instead he evoked the economic ogres of the Labour government of the 1970s that were slain only with the sword of Margaret Thatcher from 1979. All these past horrors he insisted would be reborn under Jeremy Corbyn’s “Marxist policies.” The Labour leader was “a clear and present danger to our prosperity.” The Tories must once again rally the nation against the danger of the hard left in power.
Hammond’s trip down memory lane was ill-judged. If Labour can now muster popular support for renationalising privatised utilities it is because the current model patently does not work well, whether for the fleeced customers of monopoly water suppliers or for harassed rail commuters hit by high fares as well as no seats and often no services at all. Moreover, it wasn’t that long ago that a certain election manifesto disavowed “untrammelled free markets.” That ideological retreat by the Conservatives in the spring may have been largely forgotten in the furore about what was swiftly labelled the “dementia tax.” But their manifesto also notably declared a belief in “the good that government can do.”
“If Labour can muster popular support for nationalisation it is because the current model patently does not work”The good that Hammond in particular as chancellor can do is to set out a dispassionate account of the nation’s economy at a moment of national peril. For the “clear and present danger to our prosperity” is not Corbyn but the damaging impact of Brexit, which is already being felt as growth flags. The economy is far from being “fundamentally strong,” as Hammond claimed. Indeed it has gone from being the second-fastest growing in the G7 countries in 2016 to the slowest, with GDP rising by a mere 0.3 per cent a quarter this year.
The slowdown is all the more disappointing since the EU—which buys almost half of our exports—has been doing much better thanks to the recovery at its core in the 19-strong euro area. If Britain had voted to remain in the EU, businesses would almost certainly be stepping up their capital spending but instead they are holding back because of the lack of clarity about Britain’s future relationship with Europe. Meanwhile households are being squeezed as real wages fall once again owing to sharp rises in prices following the fall in sterling.
In his speech to last year’s conference in Birmingham, Hammond focused on the need to raise productivity. That remains pressing since productivity—output per hour worked—fell by 0.5 per cent in the first quarter of this year. Depressingly, that brought it back below the pre-crisis peak reached almost a decade ago. The government is trying to help through plans to boost skills and to upgrade the national infrastructure. But the unpalatable reality is that Brexit will be bad for productivity. By diminishing trade with the EU it will weaken the competitive pressures that foster higher efficiency. And by making Britain a less attractive home for inward investment from foreign firms seeking to operate across the EU it will reduce the beneficial effects they have in spreading new technologies and best practice.
Reflecting the power of the Treasury, modern chancellors enjoy an authority not just in Whitehall but also on the national stage that is second only to prime ministers. Hammond had a chance today to speak truth about the underlying fragility of the economy. He could have spelt out why it is so essential that Britain can continue to trade as freely as possible with the EU after Brexit and why it is wishful thinking to imagine that trade deals with the rest of the world can make up for the losses arising from restrictions with our main trading partner. In short he could have shared the Treasury’s thinking with the party faithful. Hammond should have opened up his gloomy spreadsheets to the conference and the nation rather than trying to play the part of a latter-day Pangloss.
