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U.K. Spending Plan, First Since ‘Brexit’ Vote, Is Expected to Shelve Austerity U.K. Shelves Austerity in First Spending Plan Since ‘Brexit’ Vote
(about 7 hours later)
LONDON — After years of tough spending curbs, Britain’s government was expected on Wednesday to bury the rhetoric of austerity, and to try to placate struggling working-class families who feel they have paid the price for the economic downturn that followed the financial crisis. LONDON — After years of tough spending curbs, Britain’s government on Wednesday cast aside the language of austerity as it acknowledged the high economic cost of withdrawal from the European Union, and tried to placate struggling working-class families whose incomes have stagnated.
Help for workers whose low incomes are topped up by welfare payments, a raise in the minimum wage, and modest new infrastructure spending were expected from the first Autumn Statement from Philip Hammond, who became chancellor of the Exchequer, or finance minister, in July. A pledge by the previous chancellor of the Exchequer, or finance minister, George Osborne, to balance the budget by 2020 has been shelved. Instead, the current chancellor, Philip Hammond, is replacing it with a vaguer ambition to do so as soon as practical after 2020.
Changes are likely to be centered on a section of society identified by Prime Minister Theresa May as those “just about managing,” also referred to as JAMs, who are thought to have voted in large numbers for British withdrawal from the European Union, or Brexit, in the June 23 referendum. Help for workers whose low earnings are supplemented by welfare payments, an increase in the minimum wage and new infrastructure spending were features of the first Autumn Statement, or spending plan, from Mr. Hammond, who became chancellor in July.
Plans to finance construction of 40,000 new homes, and to provide more help with child care, are expected. Changes were centered on a section of society identified by Prime Minister Theresa May as those “just about managing,” also referred to as JAMs, who are thought to have voted in large numbers for British withdrawal from the European Union, or Brexit, in the June 23 referendum.
But there is a catch. For this group, as for others, the specter of Britain’s withdrawal from the European Union hovers over the economy. The uncertainties of the situation complicate life for Mr. Hammond and threaten to hit living standards just as they were beginning to improve for some. Mr. Hammond laid out plans to finance construction of 40,000 new affordable homes and to provide more help with child care, though there was also a less welcome increase in the tax on insurance premiums.
Despite better economic figures so far than many had feared, growth projections are being lowered, and borrowing estimates and inflation forecasts raised. And there is a bigger catch. For the JAMs, as for others, the specter of Britain’s withdrawal from the European Union hovers over the economy. The uncertainties of the situation complicate life for Mr. Hammond and threaten to hit living standards just as they were beginning to improve for some.
A pledge by the previous chancellor, George Osborne, to balance the budget by 2020 has been junked. The statement on Wednesday is likely to outline what will replace that target. While Brexit has not had the immediate negative effects some economists predicted, Mr. Hammon announced lower growth projections and higher borrowing estimates and inflation forecasts.
One of the cabinet’s steadiest, and most sober, performers, Mr. Hammond is nicknamed Spreadsheet Phil because of his reputation for approaching politics more like an accountant than a visionary. “Our task now is to prepare our economy to be resilient as we exit the E.U.,” Mr. Hammond told lawmakers.
He was moved from his post as foreign secretary to become chancellor shortly after the June referendum. He — like Mrs. May — had argued against Britain’s withdrawal. One of the cabinet’s steadiest, and most sober, performers, Mr. Hammond is nicknamed Spreadsheet Phil because of his reputation for approaching politics more as an accountant than a visionary.
That has made him a target for ideological opponents on the right of the governing Conservative Party, who want to speed British withdrawal, fearing that their goal of a swift, clean break with the European Union will be betrayed. He was moved from his post as foreign secretary to become chancellor shortly after the June referendum. He, like Mrs. May, had argued against Britain’s withdrawal.
After Mr. Hammond warned in television interviews on Sunday of a rocky outlook and of an economy with an “eye-wateringly large debt” that faces a “sharp challenge,” supporters of the withdrawal accused him of relentless negativity. That has made him a target of ideological opponents on the right of the governing Conservative Party, who want to speed British withdrawal, fearing that their goal of a swift, clean break with the European Union will be betrayed.
Mr. Hammond’s critics have been buoyed by the fact that those who argued in favor of Britain’s European Union membership issued dire warnings about the economic impact of leaving — predictions that have yet to come true. After Mr. Hammond warned in television interviews on Sunday of a rocky outlook and an economy with an “eye-wateringly large debt,” supporters of the withdrawal accused him of relentless negativity. On Wednesday, official forecasts suggested that he was correct and that the nation’s debt would rise to more than 90 percent of gross domestic product in 2017-18 from 84.2 percent last year.
“It is likely that a big fiscal stimulus is reserved for later budgets once we have more information on the impact of the Brexit process,” Sonali Punhani, an analyst at Credit Suisse, wrote in a note for clients. Despite the positive economic signs so far, forecasts from the independent Office for Budget Responsibility underscored the high price Britain is likely to pay for Brexit over the next five years.
Despite the positive economic signs, there are some worrying signals. The pound has fallen steeply — a development that is likely to stoke inflation, which looks likely to outstrip wage increases. That would depress living standards. During that time, potential growth will be 2.4 percentage points lower than would have been the case, Mr. Hammond said. Over the five-year forecasting period, around $75 billion of a total of $150 billion in additional borrowing can be attributed to Brexit.
And Britain has yet to start negotiations on its withdrawal, let alone quit the European single market of almost 500 million consumers. Driven by the steep fall in the value of the pound, inflation is coming back. “We expect the pound’s fall to add almost 2 percent to the level of consumer prices over the next two years,” said the Office for Budget Responsibility, adding that “real earnings growth will consequently fall close to zero next year.”
Mrs. May plans to invoke withdrawal talks, scheduled to last two years, before the end of March, but uncertainty over the future trading environment seems to be chilling inward investment and reducing tax collection. It added that, over all, “the government has opted neither for a large near-term fiscal stimulus nor for more austerity over the medium term.”
British businesses have been jittery since the referendum, and there was alarm at Mrs. May’s suggestions in October that she prioritized regaining control of immigration policy. A willingness to accept the free movement of European workers is normally a quid pro quo of winning unfettered access to the bloc’s single market. So Mrs. May’s comments suggested to many that she was aligning herself with those in favor of a clean break. Mrs. May plans to invoke withdrawal talks, which are scheduled to last two years, before the end of March, but uncertainty over the future trading environment seems to be chilling inward investment and reducing tax collection.
On Monday, Mrs. May sought to reassure businesses fearing a sudden change in rules once Britain leaves the European Union, suggesting that she would seek a deal with the bloc that involves a transition. She also retreated on suggestions that businesses would be forced to place worker representatives on company boards. British businesses have been jittery since the referendum, and there was alarm at Mrs. May’s suggestions in October that she prioritized regaining control of immigration policy over maintaining unfettered access to the bloc’s single market. So Mrs. May’s comments suggested to many that she was aligning herself with those in favor of a clean break.
Britain faces some longstanding economic difficulties. According to a research note from three economists at Bank of America Merrill Lynch, those include “woeful productivity performance, the already probably undeliverable austerity that is planned in day-to-day government spending, and the large long-term deterioration in the finances that will result if the government delivers on its plan to reduce migration to the tens of thousands.” On Monday, Mrs. May sought to reassure businesses fearing a sudden change in rules once Britain leaves the European Union. She also retreated on suggestions that businesses would be forced to place worker representatives on company boards.
The economists wrote that they expected 150 billion pounds, or about $187 billion, of extra government borrowing between now and 2021, mainly driven by “a likely weaker growth forecast due to Brexit,” with gross domestic product 2.5 percent lower over the long term than it would otherwise have been. Britain faces some longstanding economic difficulties. According to a research note from three economists at Bank of America Merrill Lynch, those include “woeful productivity performance, the already probably undeliverable austerity that is planned in day-to-day government spending and the large long-term deterioration in the finances that will result if the government delivers on its plan to reduce migration to the tens of thousands.”
Overall, they added, “Brexit means, eventually, higher taxes, lower government spending or permanently higher borrowing.” Over all, they added, “Brexit means, eventually, higher taxes, lower government spending or permanently higher borrowing.”
None of which is likely to make it easier for the government — or for struggling Britons. While much of Mr. Hammond’s address had been telegraphed in previous days, he did throw one curveball: His first Autumn Statement, he said, would also be his last.
Starting next year, he will move Britain’s annual budget statement from the spring to the autumn, so that taxation changes can be announced well before the start of the tax year, in April. There will be an annual spring statement responding to economic forecasts, but no regular fiscal event, he said.