Hammond is playing a high stakes game with the economyby George Magnus / November 1, 2018 / Leave a comment
While the chancellor was delivering the Budget statement earlier this week, a friend sent me a text message reading “Where did he get all this money from?”
It was a great question. Without the extra money, the government would be up its Brexit creek without so much as a pooh stick, let alone a paddle. It is a windfall the government did not expect. Instead of using it to balance the budget and start to pay down debt, Philip Hammond returned it to the country, mostly in the form of higher NHS spending. While he still plans to bring the deficit down to a low level and reduce debt as a share of GDP in the next five years, the hallowed balanced budget has dropped out of the forecast horizon even though, cyclically adjusted, the budget is in small surplus throughout.
Yet the windfall could also be fleeting, we just don’t know, and neither does the chancellor. If it were, the consequences could be explosive.
The government has been lucky. The politics of budgetary policy started to change before it had any inkling of its good fortune. Coinciding with the 70th anniversary of the founding of the NHS in early July, the prime minister announced the big boost in NHS spending the chancellor just confirmed. As parliament shut down for the summer holidays, the government lifted the public sector pay cap that had been held for five years at 1 per cent. The political rhetoric about austerity began to change, until the prime minister announced its end formally at the Conservative Party conference in early October. By then the government was almost certainly aware of good news from the Office for Budget Responsibility.
In a nutshell, the OBR told the government that borrowing in 2018-19 would be about £11.9bn lower than expected thanks mainly to stronger tax revenues. And even better, that the improvement in the profile for tax revenues wasn’t a one-off. Thanks to a revised outlook for sustainably lower unemployment, higher labour force participation and inflation, and higher growth in the money value of GDP, tax receipts, especially of National Insurance contributions, corporation tax and VAT would remain buoyant. The cumulative improvement in tax receipts by 2022-23 is predicted to be around £83bn, which the OBR hailed as one of the biggest fiscal swings in recent…