Any Budget Giveaway Will be a Drop in the Brexit Ocean
The Budget speech used to be a grand occasion. Political titans over the years such as Gordon Brown, Geoffrey Howe, Benjamin Disraeli and Willian Gladstone used the event to both steer the economy and bolster their own positions.
With the opportunity to speak uninterrupted for anything from 47 minutes to five hours (Disraeli in 1852), the Chancellor has had a unique opportunity to delight his (yes, always a man) supporters and frustrate his opponents by pulling rabbits out of his hat. A tax cut here, extra spending there — soon he could be talking about serious money.
This week’s Budget is unlikely to feature in the list of the great orations. With just 16 months until Britain leaves the European Union with or without a trade deal and with the final exit bill still not settled, Chancellor Philip Hammond has little room for manoeuvre. And with an election some four years away, there is little incentive to blow any cash now.
Even putting the politics aside, the economics have left him little leeway. A real headache for Hammond is productivity growth.Over the pre-financial crisis period, output per hour worked was estimated to have grown by a reasonable 2% per annum that, together with, an expanding workforce, translated into trend growth of 2.5%-3.0% a year.
But since 2010, gains in annual productivity have averaged just 0.3% a year, an historic low. The Office of Budget Responsibility has indicated that it will downgrade its growth forecasts to take account of that. Recent reports point to the downgrade wiping out about two-thirds of the government’s £26bn budget surplus from 2017 to 2021.
This was the war chest set aside by the chancellor in the previous budget in March to cope with a potential slowdown after a disorderly and harmful EU exit.
But Hammond is under attack from Brextremists within his own party, who have accused him of being the Eeyore character in AA Milne’s Winnie the Pooh by talking down the economy rather than highlighting the huge economic benefits that Brexit will allegedly bring.
This is likely to be a holding Budget
Vilified by his opponent but boxed in by the economics, Hammond will undoubtedly find some slightly undernourished bunnies to produce from his faded hat. The Conservatives have already promised to inject another £10bn into the Help to Buy scheme — the homebuyers’ subsidy that has been blamed for fuelling further home price rises — but that will add to the debt rather than borrowing.
What we can also expect are an increase in the income tax personal allowance to £12,500 and the higher rate threshold to £50,000 by 2020 that will cost a combined £1.1bn in 2020-21. On top of that will be £2bn of extra funding to build 25,000 additional affordable homes over five years and changes to students to student loans costing £2bn over the long term.
But whatever ever other gimmicks and baubles appear on Wednesday, they pale into insignificance compared with the bill that Theresa May may or may not agree to next month to cover the UK’s debts to the EU. May has offered €20bn but the EU has set out obligations of €100bn and she may, as one analysis has concluded, limit it to €32bn — but whatever the figure it will dwarf anything Hammond can hand out.
Of course, Labour is in a bind as it is hard to know how much of its manifesto pledge for £50bn of investment and spending and its £250bn of borrowing to fund renationalisations it can afford until it knows the bill (or whether it will halt Brexit and save money that way).
This is likely to be a holding Budget, rather than the tough tax-raising statement that tends to come in the first months after a General Election but an attempt to please all sides in the Brexit debate.
What the country needs is a brace package of measures that aims to solve the long-term problems such as low productivity and a declining manufacturing sector while addressing emerging challenges such as automation. But sadly, there is just no political “bandwidth”. So, enjoy the gags, hope for some surprises and look out for whatever Hammond has as his tipple for the
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