Spring statement: Hammond’s promise of a “deal dividend” is nothing short of absurd

It was a hollow promise from the chancellor in place of a proper strategy

March 13, 2019
Photo: Joe Newman/Xinhua News Agency/PA Images
Photo: Joe Newman/Xinhua News Agency/PA Images

Beyond the statistics, the impact of austerity has become increasingly visible to all of us, from the growth in homelessness and the use of food banks to broader pressures on schools, the NHS, social care and police. No one any longer seriously disputes that the quality of public services has been considerably degraded over the past years. Today in his spring statement the chancellor—just as parliament has done with Brexit—chose to kick the can. While largely sensible, the minor measures he did announce for housing and infrastructure don’t constitute a strategy.

Gordon Brown used to offer “prudence with a purpose”; Philip Hammond’s equivalent is the “deal dividend”; the promise that if we do secure a Brexit deal, this will allow him to “end austerity” in the public spending review scheduled for this autumn. This carrot is counterbalanced with a very big stick—that no-deal will lead to higher unemployment, lower growth and, implicitly, further cuts in public services down the line.

What this means is that the economic forecasts published today are essentially meaningless. In the event of no-deal, they will be torn up in weeks. Although the economic hit will make the longer term prospects for the public finances worse, balancing the books will be the least of Hammond’s worries.

Indeed, we know the Treasury is making contingency plans—alongside today’s announcement of tariff liberalisation across a wide range of traded goods—for emergency measures to boost demand and confidence, which will mean more spending and higher deficits in the short run. This is entirely sensible. The chancellor will follow Brown’s Keynesian playbook after the financial crisis, rather than George Osborne’s absurd pre-referendum scaremongering. But it’s not a long-term strategy. No-deal will be about crisis management.

By contrast, if there is a deal, then spending will rise slightly in the medium and long-run compared to existing plans, as the chancellor spends the recent modest increase in tax revenues. But calling this a “deal dividend” is of course absurd. As the government’s own analysis has shown, the reductions in trade and immigration that the deal will deliver will reduce, not increase, growth and tax revenue over the medium to long term.

Nevertheless, it is true that, assuming a smooth Brexit, the Office for Budget Responsibility has revised up its forecasts of tax receipts. But this isn’t a deal dividend. Economic performance remains deeply mediocre by historical standards, with per capita GDP forecast to grow by less than 1 per cent a year for the next three years. Instead, it’s an “inequality bonus.” As the OBR says, it’s been “driven by particularly strong earnings growth among the highest earners.” Recent ONS figures also confirmed that, after a period during which inequality was relatively stable, it appears to be rising.

The flipside of the rich getting richer is likely to be the poor getting poorer—the child poverty statistics, to be published later this month, are expected to show a further increase, driven by another year of benefit cuts. And there’s more in the pipeline—the continued benefit freeze and the three-child limit in Universal Credit will continue to push up poverty.

Most importantly, ending austerity, not just in the sense of not making further spending cuts, but undoing the damage that has already been done, will require not just a little more money now, but significant real-terms increases in spending for public services over the medium and long-term. And the chancellor—even under the most optimistic assumptions on Brexit—won’t be able to rely on the “trickle-down effect” for that. More borrowing, and ultimately higher taxes—not just on the rich but on all of us—will be required.