Philip Hammond has admitted that the Brexit vote’s blow to the economy would force the government to borrow £122bn more than hoped as he pushed back government plans to balance the books in his autumn statement.
In the government’s first major economic announcement since the vote in June to leave the EU, the new chancellor said the economy was faring well in the wake of the referendum result but growth would slow markedly next year on the back of weaker business spending and a squeeze on household budgets from rising living costs.
“Our task now is to prepare our economy to be resilient as we exit the EU and match-fit for the transition that will follow,” said Hammond, who replaced George Osborne as chancellor in the political crisis that followed the referendum.
Labour said Hammond’s statement was an admission that the government’s long-term economic plan had failed. John McDonnell, the shadow chancellor, said it showed “the abject failure of the last six wasted years”.
Hammond began his speech with a robust defence of the economy’s performance following the 23 June referendum, saying it had “confounded commentators at home and abroad with its strength and resilience since the British people decided, exactly five months ago today, to leave the European Union and chart a new future for our country”.
But the chancellor soon began outlining a very different picture, saying the government had “more work to do to eliminate the deficit”.
Hammond dropped Osborne’s target for a surplus on the public finances by the end of the decade but announced his own fiscal rules that kept a focus on bringing down borrowing over a longer period.
He unveiled three new rules of his own: for borrowing to be below 2% of GDP by the end of the parliament; for public sector net debt to be falling by the same time; and for welfare spending to remain within an OBR-monitored cap.
The economy would grow 2.1% this year, faster than the 2.0% forecast in March, Hammond said as he unveiled a new outlook from the the government’s independent forecaster, the Office for Budget Responsibility (OBR). But the growth forecast for next year was cut to 1.4% from 2.2%.
“That’s slower, of course, than we would wish, but still equivalent to the IMF’s forecast for Germany, and higher than the forecast for growth in many of our European neighbours, including France and Italy,” Hammond said.
That slowdown would have a knock-on effect on the government’s finances and so borrowing was expected to be significantly higher than at the time of Osborne’s final budget back in March.
The OBR now expects government borrowing this financial year alone will be £68.2bn, well above the previous estimate of £55.5bn. A forecast for the public finances to be back in surplus by the end of the decade was abandoned and in total the new forecasts amount to £122bn of extra borrowing over the next five years compared with the outlook before Britain voted to leave the EU.
“In view of the uncertainty facing the economy, and in the face of slower growth forecasts, we no longer seek to deliver a surplus in 2019-20,” said Hammond.
“But the prime minister and I remain firmly committed to seeing the public finances return to balance as soon as practicable, while leaving enough flexibility to support the economy in the near term.”
Hammond used his his first set-piece speech as chancellor to announce measures to drive up the UK’s woeful productivity growth with a £23bn innovation fund and investment in rail, telecoms and housing.
There were also giveaways for “just managing families” and relief for motorists hit by rising pump prices as Hammond cancelled a planned rise in fuel duty.
He announced, as expected, an increase in the “national living wage” from £7.20 to £7.50 an hour from April 2017. That is slightly below the £7.60 figure that the OBR estimates would be necessary for it to stay on course to match the pledge of £9 an hour by 2020.
He confirmed widely trailed plans for a ban on letting fees and a package of support to encourage the construction of new affordable homes.
The chancellor said the government’s independent watchdog, the OBR was now forecasting a weaker outlook than at the time of March’s budget.
Its main predictions, compared with before the Brexit vote, are now:
- Extra £122bn of government borrowing over next five years.
- Public finances no longer expected to be back in surplus by 2019-20.
- Economy to grow 1.4% in 2017, compared with 2.2% forecast in March.
- Economy to grow 1.7% in 2018, compared with 2.1% forecast in March.
- Economy to grow 2.1% in 2019, compared with 2.1% forecast in March.
The forecast for growth of 1.4% next year compares with a Bank of England prediction of 1.4% and an IMF forecast for 1.1% growth.
The OBR’s new outlook painted a more benign picture on the prospects for inflation next year and beyond than some other forecasters have done.
It predicts inflation will rise from 0.7% this year to 2.3% in 2017 and 2.5% in 2018. That compares with the Bank of England’s forecasts for inflation of 2.7% in 2017 and in 2018.
The OBR forecasts unemployment will edge up from 5% this year to 5.2% next year and 5.5% in 2018.
Summing up the government’s latest plans, the OBR said: “Confronted by a near-term economic slowdown and a structural deterioration in the public finances, the government has opted neither for a large near-term fiscal stimulus nor for more austerity over the medium term.”
In one potentially significant move for the future, Hammond indicated a possible end to the “triple lock” that guarantees pensions always rise by whatever is the highest of the rate of inflation, average earnings or a minimum of 2.5%.
This would remain in place for this parliament, along with guarantees on spending for defence and foreign aid, the chancellor said.
He added: “But as we look ahead to the next parliament, we will need to ensure that we tackle the challenges of rising longevity and fiscal sustainability.
“So the government will review public spending priorities and other commitments for the next parliament in the light of the evolving fiscal position at the next spending review.”
While Hammond began the speech with a promise of no “rabbits from hats”, he ended on one surprise – announcing that his first autumn statement would also be his last.
The 2017 budget would be the last held in spring, with the event moving to autumn from 2018, he said. There would be a spring statement, but this would be a lower-key update on forecasts, rather than a time for major changes.
The chancellor belied his sober reputation with a series of jokes, one aimed at Boris Johnson’s failure to become prime minister.
More predictably, he also took aim at the pre-statement requests of McDonnell. Hammond contrasted these with the efforts of the former shadow chancellor turned Strictly Come Dancing favourite Ed Balls.
“We used to think on this side of the house that Ed Balls’ demands were an extreme example,” Hammond said. “But I have to say, the current shadow chancellor has outperformed him in the fiscal incontinence sweepstakes. What we don’t know, of course, is whether he can also dance.”
Responding to the statement, McDonnell said the chancellor was offering “no hope for the future”.
“The verdict could not be clearer – the so-called long-term economic plan has failed,” the shadow chancellor said.
“As the Treasury’s own leaked paper revealed, the government knew it had failed before the referendum result was announced. We now face Brexit, the greatest economic challenge of a generation, and we face it unprepared and ill-equipped.”
The government had “no answers to the challenges facing our country following Brexit, and no vision to secure our future prosperity,” McDonnell said.
He added: “The chancellor must now do the right thing for British workers and businesses. He must insist on full, tariff-free access to the single market. He and the Treasury know that’s what will give the best deal for jobs and prosperity here.
“It may not be in the chancellor’s nature, but in the national interest I urge him to stand up to the prime minister and the extreme Brexit fanatics in her cabinet.”