The Spring Budget was so Philip Hammond

Here's my take on the Budget yesterday, as published in Cicero Group's special report....

An exciting cover and a snazzy name

An exciting cover and a snazzy name

When Philip Hammond spoke of the Brexit rollercoaster at Conservative Conference in October, he probably didn’t anticipate that the economic outlook would be so benign for his Spring Budget. Growth is higher than expected, employment is robust, borrowing is lower. Project Fear it ain’t.

While this gives Hammond a bit of space, he has been careful not to allow the positive message to slide into hubris. For a start, he is all too aware that OBR forecasts are highly sensitive to growth projections and growth forecasts are notoriously fickle. If UK consumers stop borrowing to fund consumption as they have been, or the housing market stutters, then the fiscal situation could deteriorate quite quickly leaving him in a difficult spot in the autumn.

Brexit looms over all, but was barely mentioned either in the statement or the Red Book. That’s because this was a Budget that focussed primarily on domestic challenges. The most important of these is addressing the funding crisis in social care. Hammond has managed to find some money to help provide relief to hard-pressed local authorities, but a long-term solution must be found. Regardless of the solution the Government chooses, this is possibly the most important long-term social policy discussion since the Turner Commission reforms to the pension system. The Government will publish a Green Paper on funding later this year, but in an emphatic and pointed pledge, the death tax will not be an option up for consideration.

This budget was so Philip Hammond

George Osborne’s love of the ‘big reveal’ was the cause of a lot of heartburn both inside Government and outside. Conversely, Philip Hammond has taken much of the drama out of fiscal events, though he has an unexpected knack for delivering a good joke. Those who have seen him speak often will recognise the wry sense of humour increasingly finding its expression at the despatch box. He delivered some zingers today, mostly at the expense of Labour. It’s clear he’s enjoying himself.

Though deficit reduction remains the sine qua non of fiscal policy, there is also the emergence of a distinct ‘Hammond-ian’ approach in which difficult reforms will be made if they tackle unfairness in the system. Take also the bold statement that the Government would not shrink from raising taxes if needed – and that these changes would be clearly spelt out.

For example, a long section of Hammond’s statement carefully addressed the imbalance in taxation between self-employed and employed people. Seemingly breaking a Conservative manifesto commitment – and ditching reforms proposed by George Osborne – he has tweaked national insurance rates so that the self-employed will pay more from April 2018. This will face stiff opposition in some quarters, and it’s almost inconceivable that Osborne would have chosen a similar route; his visible wince at the announcement was telling. Hammond is also reducing the taxfree allowance on dividends to try to close a similar gap in taxation for owner-directors and company employees. This is probably the first step in a longer-term equalisation of tax treatment so that individuals cannot use their employment status to arbitrage the tax system. It will make the system fairer, but it was certainly not the path of least resistance.

Productivity

If the Chancellor is enthusiastic about one thing, it’s productivity and particularly the role of technology in boosting it. He has long said that UK workers are less productive than those in France, Germany and Italy. The UK’s competitiveness is derived from the fact that the British simply work longer hours to produce the same amount. This is not a new problem, but Hammond is unusual in the fact that he has made it a signature priority. The two pillars of Hammond’s productivity offensive are training and infrastructure. There is a package of measures today to try to address this including the introduction of new T-Levels, £270m of funding for cutting-edge R&D and 1,000 new PhD places and fellowships in STEM subjects. There is also some cash for 5G, fibre roll-out and the alleviation of road congestion.

The future

A low-key Spring Statement to update on the public finances and an Autumn Budget is the new fiscal rhythm to which Whitehall will march. Hammond has again showed he has no intention of making policy on behalf of other members of the Cabinet. In any case, the Chancellor has a number of long-term challenges to deal with, of which Brexit is only one. Brexit is important, but for most people making sure their loved ones are looked after in their later years – or seen by a doctor when they are ill – is a more immediate and visceral issue. All politics is local, and once the public’s attention has moved on from Brexit (as it will) it will come back to what they see every day: public services.

Birmingham and the great hard Brexit feedback loop

At conference Theresa May announced that she will trigger Article 50 by the end of March 2017 and that a Great Repeal Bill  will be brought forward at the next Queen’s Speech. In a piece of spin Alistair Campbell would be proud of, this Bill will actually incorporate the entire acquis communitaire into British law at the same time as shredding the European Communities Act.

While some were calling for more time before pressing the big red Article 50 button (notably one Mr George Osborne of Notting Hill) in order to wait for the result of French and German elections, there is some logic in the move. First, it means the Art 50 negotiations are completed one year ahead of the expected May 2020 general election. Second, it means the UK will not be participating in the 2019 European Parliament elections – which would have been a ludicrous charade. Third, it anchors Brexit to a firm timeline – which countries such as France are equally as keen to see as Brexit campaigners here at home.

May and her senior team faithfully kept to the line that there would be no running commentary on the negotiating position. And they kept on message at the events I attended, except for Liam Fox who we all know is itching to get out of the European Customs Union and as quickly as possible and can’t hide the fact. Nevertheless, the Government’s two red lines were the same as they were before conference – control over borders, and an end to the jurisdiction of the European Court of Justice. The UK will seek the closest trading ties possible within these parameters. While HMG’s position more or less rules out EEA membership, it leaves quite a few avenues open so long as the EU 27 are in negotiating mood.

But despite this, as the conference went on a sort of hard Brexit feedback loop started to form in which the idea that the UK was going to cut and run just seemed to take on a life its own. Why all the flapping, given that there was no new announcement except for the date of the trigger of Article 50 and a pretty prosaic bit of legal tidying up? I will hazard a guess or two:

  • Team Brexit were simply more prominent at conference and they were certainly chattier in the bars and backrooms
  • The change in tone from Cameron to May was so stark and uncompromising – especially on immigration – that – rightly or wrongly - it gave a sense that she couldn’t possibly favour anything other than a hard Brexit
  • Chancellor Philip Hammond’s statement of the obvious that this ride is going to have some ups and downs seemed to be to some a huge revelation
  • And media, EU and overseas observers were visibly taken aback by how quickly and completely the Conservative party had pivoted to the brave new world of Brexit  

All this drove a sort of narrative that the Government - which remember is not offering a running commentary - didn’t really do an awful lot to assuage. After all, everyone is playing high stakes poker here. But the substance rather than the presentation is now as it was then. Nevertheless, markets put the pound under such a lot of pressure that the PM’s TV interviews last Tuesday sought to reassure the world that the UK did not want to bail completely on Europe. Ladies and Gentleman, meet Her Majesty’s Loyal Opposition – the Sterling/Dollar market:

The wild drop in Sterling’s value on thin volumes overnight on Thursday hasn’t helped the jitters. In response the Chancellor on Friday told journalists at the IMF and World Bank meetings in Washington D.C. that everything was still negotiable- including continued membership of the Customs Union. But he also noted that he expected there to be more of this turbulence in the years to come. To misquote James Carville, if I am reincarnated, I want to come back as the FX market.