Philip Hammond’s first and last autumn statement was a sombre affair. The chancellor largely dispensed with political theatre to tell it straight. Britain’s economy is dysfunctional. Austerity has failed. Welfare cuts are going to bite. Brexit will be a £60bn drag on growth and the public finances. That’s the way it is.
The one small nod towards gimmickry was the £7m the government has made available to save Wentworth Woodhouse, a stately home in South Yorkshire said to be the inspiration for Pemberley in Jane Austen’s Pride and Prejudice. A different chancellor would have milked the literary allusion for a few cheap laughs.
Not Hammond, though. At root, his statement was all about how the vulnerabilities of the British economy have been exposed by the decision to leave the European Union. There is a 30% productivity gap between Britain and Germany. Prosperity is concentrated in London and the south-east. There has been insufficient investment in research and development, in transport infrastructure, in superfast broadband and in housing.
These deficiencies explain why the government has struggled in vain to eliminate the record peacetime budget deficit it inherited from Labour in 2010 and why the UK’s balance of payments deficit is running at 6% of national output. In or out of the EU, they would need to be addressed. Brexit has made tackling them more urgent.
The vote on 23 June has given Hammond the chance to break with the past. Although the economy is expected to slow over the next two years, the chancellor has decided to borrow to invest. The government has put aside £23bn for infrastructure projects over the next five years, a relatively modest sum in the context of a £1.8tn economy but welcome nevertheless.
Money has become available because Hammond has dispensed with George Osborne’s plan to run a budget surplus by the end of the current parliament in 2019-20. By pushing deficit reduction beyond the next election, the chancellor has given himself scope for some additional public expenditure while at the same time holding something back in case the relatively benign forecasts for the economy from the Office for Budget Responsibility (OBR) prove optimistic.
Before the referendum, Osborne made dire predictions for the economy should Britain vote to leave the EU. The Treasury suggested there would be an instant recession necessitating an emergency budget involving £30bn of tax increases and spending cuts.
In the event, strong consumer confidence has meant the economy has beaten expectations. The OBR has slightly raised its growth forecast for 2016, a year in which the UK’s economy looks likely to expand more quickly than any of its G7 rivals.
Next year it is a different story. The OBR thinks the fall in the value of the pound will result in dearer imports, higher inflation and a stalling of real income growth. It also expects uncertainty caused by the Brexit divorce negotiations to result in weaker private investment.
Both these assumptions look plausible despite Hammond’s autumn statement measures. Higher government spending on infrastructure is designed to compensate for the hesitancy of the private sector to commit to new capital projects, while the higher national living wage, the modest adjustments to universal credit and yet another year of frozen fuel duties are intended to support the consumer.
But the impact of these moves should not be exaggerated. There was a strong element of continuity in the autumn statement: the bulk of the cuts announced by Osborne will still go ahead. There was no extra money for the struggling NHS and thin gruel for the so-called Jams (just about managing households) despite the hype. The Child Poverty Action Group has calculated that a single parent with one child and no housing costs earning £15,000 a year will be £170 a year better off as a result of the new universal credit regime. But the same person stood to lose out by £3,170 a year as a result of the summer 2015 budget.
Hammond has the scope to provide more help for the Jams during 2017 when there will be both a spring and an autumn budget. The OBR says the delay in balancing the budget until the next parliament means he has the scope to borrow £56bn more by 2020-21 than Osborne was planning. Of that, £20bn will be soaked up by lower growth and a further £10bn has been earmarked for higher spending, mainly on infrastructure. That leaves Hammond £26.5bn to play with.
The autumn statement, in other words, is not a self-contained work like Pride and Prejudice, but more a trilogy with parts two and three to come next year. Which one? Well, the economy is shrouded in fog, the government believes that fiscal pain will be worth it in the end and the chancellor makes a virtue out of being Mr Ordinary. Simple really: Fifty Shades of Grey.