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| Philip Hammond must ditch deficit reduction and invest. But he won't | Philip Hammond must ditch deficit reduction and invest. But he won't |
| (about 1 month later) | |
| Philip Hammond did not get his nickname of “Spreadsheet Phil” for nothing. The chancellor is a cautious man, who thinks that tackling Britain’s productivity challenge is a better use of his time than trying to wrongfoot his opposite number, John McDonnell, with political gimmicks. | Philip Hammond did not get his nickname of “Spreadsheet Phil” for nothing. The chancellor is a cautious man, who thinks that tackling Britain’s productivity challenge is a better use of his time than trying to wrongfoot his opposite number, John McDonnell, with political gimmicks. |
| Hammond’s instinct in the run-up to his second budget has been to hunker down, to hide himself away in the Treasury and send out messages that he simply doesn’t have the money to bail the government out of its current troubles. | Hammond’s instinct in the run-up to his second budget has been to hunker down, to hide himself away in the Treasury and send out messages that he simply doesn’t have the money to bail the government out of its current troubles. |
| The chancellor finally broke cover on Sunday but the (by now) familiar budget talk of building more houses and backing driverless cars was rather overshadowed by his remarkable claim on the BBC’s Marr programme that there are no unemployed people in Britain. A month ago Hammond had to backtrack after calling the EU “the enemy”; now he appears to have forgotten the 1.4 million-plus who are officially jobless. For someone whose USP is that he is a safe pair of hands, the chancellor is becoming a bit gaffe prone. | The chancellor finally broke cover on Sunday but the (by now) familiar budget talk of building more houses and backing driverless cars was rather overshadowed by his remarkable claim on the BBC’s Marr programme that there are no unemployed people in Britain. A month ago Hammond had to backtrack after calling the EU “the enemy”; now he appears to have forgotten the 1.4 million-plus who are officially jobless. For someone whose USP is that he is a safe pair of hands, the chancellor is becoming a bit gaffe prone. |
| Personally, he could do with an all-singing, all-dancing budget that wins praise for its vision and boldness, but the Treasury has been at pains to downplay expectations of anything like that on Wednesday. No money, no majority, no productivity growth, no giveaways has been the theme. Debt remains too high and the fiscal targets have to be hit. Cash has to be found for Brexit preparations, for the DUP, for the U-turn on self-employed national insurance contributions after the last budget, and for the promises made to students and to homebuyers during the Conservative party conference. The cupboard is pretty much bare. | Personally, he could do with an all-singing, all-dancing budget that wins praise for its vision and boldness, but the Treasury has been at pains to downplay expectations of anything like that on Wednesday. No money, no majority, no productivity growth, no giveaways has been the theme. Debt remains too high and the fiscal targets have to be hit. Cash has to be found for Brexit preparations, for the DUP, for the U-turn on self-employed national insurance contributions after the last budget, and for the promises made to students and to homebuyers during the Conservative party conference. The cupboard is pretty much bare. |
| Philip Hammond’s November 2017 budget will reflect the tricky choices facing the chancellor as he seeks to balance the forces pulling him in opposite directions. | Philip Hammond’s November 2017 budget will reflect the tricky choices facing the chancellor as he seeks to balance the forces pulling him in opposite directions. |
| Downgrades to the UK’s long-term growth potential by the Office for Budget Responsibility will complicate Hammond’s budget arithmetic, as will uncertainty over the impact of Brexit on the economy. | Downgrades to the UK’s long-term growth potential by the Office for Budget Responsibility will complicate Hammond’s budget arithmetic, as will uncertainty over the impact of Brexit on the economy. |
| Both would normally result in an ultra-cautious approach. | Both would normally result in an ultra-cautious approach. |
| But the loss of the government’s overall majority in the June general election has ramped up the pressure on the chancellor to spend money in areas where the Conservatives feel vulnerable: housing, the NHS, education and infrastructure. | But the loss of the government’s overall majority in the June general election has ramped up the pressure on the chancellor to spend money in areas where the Conservatives feel vulnerable: housing, the NHS, education and infrastructure. |
| Hammond is short of cash, so the budget will be a mixture of tax-raising measures and giveaways. | Hammond is short of cash, so the budget will be a mixture of tax-raising measures and giveaways. |
| Even so, Hammond can’t simply deliver a do-nothing budget this week. Yes, public debt is high. Yes, Brexit is a great imponderable. Yes, there is an argument for caution, as there always is. But for both political and economic reasons, it is time for a different approach. | Even so, Hammond can’t simply deliver a do-nothing budget this week. Yes, public debt is high. Yes, Brexit is a great imponderable. Yes, there is an argument for caution, as there always is. But for both political and economic reasons, it is time for a different approach. |
| So, the chancellor will break one of the enduring rules of British politics – that taxes are raised at the first opportunity after a general election so that voters have time to forget before the next polling day rolls around. | So, the chancellor will break one of the enduring rules of British politics – that taxes are raised at the first opportunity after a general election so that voters have time to forget before the next polling day rolls around. |
| In part that is because the two elections of 2015 and 2017 were closely bunched together and this is more like mid-term of the 2015 parliament rather than the first budget of the 2017 parliament. | In part that is because the two elections of 2015 and 2017 were closely bunched together and this is more like mid-term of the 2015 parliament rather than the first budget of the 2017 parliament. |
| Since the 2015 election, the government has introduced welfare cuts, a fresh round of departmental spending cuts and lost its overall majority. The economy has slowed over the past year as the inflation-induced squeeze on consumer budgets has led to weaker spending. After years of confidently predicting that the flatlining of productivity since the financial crisis was just a temporary blip, the Office for Budget Responsibility (OBR) now accepts that it isn’t. It will cut its forecast for the economy’s long-term trend growth rate – the pace at which the economy can expand without inflation rising – to 1.5%, and this will have knock-on effects on the public finances. Slower growth means lower tax receipts, higher spending and bigger budget deficits. The date for returning the public finances to the black will be pushed back into the mid to late 2020s. As one minister put it last week: this feels like the longest mid-term in history. | Since the 2015 election, the government has introduced welfare cuts, a fresh round of departmental spending cuts and lost its overall majority. The economy has slowed over the past year as the inflation-induced squeeze on consumer budgets has led to weaker spending. After years of confidently predicting that the flatlining of productivity since the financial crisis was just a temporary blip, the Office for Budget Responsibility (OBR) now accepts that it isn’t. It will cut its forecast for the economy’s long-term trend growth rate – the pace at which the economy can expand without inflation rising – to 1.5%, and this will have knock-on effects on the public finances. Slower growth means lower tax receipts, higher spending and bigger budget deficits. The date for returning the public finances to the black will be pushed back into the mid to late 2020s. As one minister put it last week: this feels like the longest mid-term in history. |
| The public finances don’t look all that bad given the underwhelming performance of the economy since the turn of the year. The deficit for 2017-18 is currently on course to come in around £10bn lower than the OBR envisaged at the time of the March budget. That will help cushion the blow from the downgrade to long-term growth potential and provides the chancellor with some room to piece together some sort of package for young people – a key target for the Conservatives since the election. Theresa May’s gamble on an early election failed because people in their teens, 20s, 30s and early 40s found Jeremy Corbyn’s policies on housing and student loans more attractive than what the government was offering. Six months on it’s a fair bet that the only policy anybody can remember from the Tories was the dementia tax. May is keen for the budget to be about intergenerational fairness. | The public finances don’t look all that bad given the underwhelming performance of the economy since the turn of the year. The deficit for 2017-18 is currently on course to come in around £10bn lower than the OBR envisaged at the time of the March budget. That will help cushion the blow from the downgrade to long-term growth potential and provides the chancellor with some room to piece together some sort of package for young people – a key target for the Conservatives since the election. Theresa May’s gamble on an early election failed because people in their teens, 20s, 30s and early 40s found Jeremy Corbyn’s policies on housing and student loans more attractive than what the government was offering. Six months on it’s a fair bet that the only policy anybody can remember from the Tories was the dementia tax. May is keen for the budget to be about intergenerational fairness. |
| But it was not just on student loans and the lack of affordable homes that Labour scored. One reason that George Osborne wanted to sort out the public finances in one parliamentary term was that sooner or later austerity fatigue sets in. That had not happened by the time of the 2015 election but by the time of the 2017 June poll it clearly had. Now even Tory MPs are openly calling for austerity to be abandoned. | But it was not just on student loans and the lack of affordable homes that Labour scored. One reason that George Osborne wanted to sort out the public finances in one parliamentary term was that sooner or later austerity fatigue sets in. That had not happened by the time of the 2015 election but by the time of the 2017 June poll it clearly had. Now even Tory MPs are openly calling for austerity to be abandoned. |
| In his book Square Deal, Nick Boles, the Conservative MP for Grantham and Stamford, has said the ambition of running a budget surplus is no longer appropriate. “We should drop the surplus target and not seek further cuts in the deficit below its current level. This would allow us to increase public investment by a dramatic amount.” When Ed Balls suggested this as shadow chancellor during the 2015 election campaign he was branded a “deficit denier”. | In his book Square Deal, Nick Boles, the Conservative MP for Grantham and Stamford, has said the ambition of running a budget surplus is no longer appropriate. “We should drop the surplus target and not seek further cuts in the deficit below its current level. This would allow us to increase public investment by a dramatic amount.” When Ed Balls suggested this as shadow chancellor during the 2015 election campaign he was branded a “deficit denier”. |
| The truth is that Balls was right about austerity all along. The orthodoxy since 2010 has been simple: the biggest problem facing the government is the budget deficit and provided the public finances are sorted out growth will look after itself. The opposite is true: get the economy growing and the deficit will look after itself. | The truth is that Balls was right about austerity all along. The orthodoxy since 2010 has been simple: the biggest problem facing the government is the budget deficit and provided the public finances are sorted out growth will look after itself. The opposite is true: get the economy growing and the deficit will look after itself. |
| Malcolm Sawyer, emeritus professor of economics at Leeds University, sums it up in a paper for the thinktank CLASS (the Centre for Labour and Social Studies). “The responsibility of government is not to balance the budget but to balance the economy by moving it to full employment.” | Malcolm Sawyer, emeritus professor of economics at Leeds University, sums it up in a paper for the thinktank CLASS (the Centre for Labour and Social Studies). “The responsibility of government is not to balance the budget but to balance the economy by moving it to full employment.” |
| To achieve this, there needs to be more investment. If low interest rates can’t persuade the private sector to do this, then the state steps in with higher spending on infrastructure. Higher investment boosts productivity which in turn underpins growth in wages. With money in their pockets, consumers spend more and the economy expands. Faster growth leads to higher tax revenues and the deficit comes down. | To achieve this, there needs to be more investment. If low interest rates can’t persuade the private sector to do this, then the state steps in with higher spending on infrastructure. Higher investment boosts productivity which in turn underpins growth in wages. With money in their pockets, consumers spend more and the economy expands. Faster growth leads to higher tax revenues and the deficit comes down. |
| So when the 2010 coalition government announced itself by paring back infrastructure spending and raising taxes it was equivalent to shooting itself in the foot. Britain has just been through the worst decade for productivity growth since Napoleon trooped back from Moscow in 1812. Growth per head of population – a more relevant measure than the size of the economy – is barely higher than a decade ago. As a result, deficit reduction targets have been missed, time and time and time again. | So when the 2010 coalition government announced itself by paring back infrastructure spending and raising taxes it was equivalent to shooting itself in the foot. Britain has just been through the worst decade for productivity growth since Napoleon trooped back from Moscow in 1812. Growth per head of population – a more relevant measure than the size of the economy – is barely higher than a decade ago. As a result, deficit reduction targets have been missed, time and time and time again. |
| Despite what the chancellor might say this week there is an alternative to this approach, and always has been. A change of course is long overdue. | Despite what the chancellor might say this week there is an alternative to this approach, and always has been. A change of course is long overdue. |
| •Follow Guardian Business on Twitter at @BusinessDesk, or sign up to the daily Business Today email here. | •Follow Guardian Business on Twitter at @BusinessDesk, or sign up to the daily Business Today email here. |
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