For years Britain has had not one annual budget but two. The real deal – the one where the chancellor stands outside 11 Downing Street with his little red box – has been in the spring, but there has also been another round of tax and spending measures included in an autumn statement.
Philip Hammond has changed all that. As of now, there will be only one big set-piece event each year and it will be a budget in the late autumn. This week we will see the first spring statement, a pared-down affair in which the chancellor will provide the latest economic and public finance forecasts from the Office for Budget Responsibility, announce some areas for consultation and leave it at that. No tax sweeteners, no extra money for cabinet colleagues pleading for cash, no change to the government’s deficit-reduction approach.
Hammond made it clear on the BBC’s Andrew Marr Show that he doesn’t want the spring statement to create too many waves, and there are both political and economic reasons for adopting such an approach. It is less than a year since the last election and unless forced to do so chancellors don’t give money away early in a parliament even if it means alienating voters as a result. As it happens, the polls are not looking too bad for the Conservatives.
Hammond certainly has the scope to be generous should he wish to be. Although it is less than four months since the last OBR update on the economy, there have been three developments worthy of note – all of them helpful to the chancellor.
Firstly, growth in 2017 – while sluggish – has come in above the OBR’s November forecast of 1.5%. An upgrade to the 1.4% predicted for 2018 also looks likely.
Secondly, the public finances look a lot better or, to be more accurate, much less bad than expected last autumn. Back then the OBR was assuming a budget deficit of just shy of £50bn in the current financial year: the actual figure looks like being closer to £40bn. For the first time since the financial crisis, tax receipts are covering day-to-day government spending, which means the Treasury is only borrowing for investment.
Finally, no sooner had the OBR slashed its forecasts for productivity than the numbers started to improve, with the final two quarters of 2017 recording output per head rising by 0.8-0.9%. While it is far too early to draw any hard conclusions from such limited data, it is possible the OBR has been a little too gloomy about the long-term productivity outlook.
Hammond’s instinct is to bank all these gains, and that would be the case even if he was standing up on Tuesday to deliver a classic spring budget. The chancellor is uncomfortable with a national debt that has more than doubled as a share of annual output (gross domestic product) in the past decade because he knows that sooner or later the economy will have another recession. He would prefer to face that with the debt ratio a lot lower than its current 86% of GDP.
Finally, of course, there’s the little matter of Brexit, now little more than a year away. All things considered, the government has been pleasantly surprised by how well the economy has held up since the referendum but accepts that there could be more difficult times ahead. It thinks the economy might be more of need of support in 2019 than it is in 2018.
Labour would prefer a bolder approach. The shadow chancellor, John McDonnell, says that austerity has been holding growth back – an argument backed by the OBR. There is no doubt that the economy would have expanded faster had it not been for the curbs on departmental spending, welfare cuts and tax increases implemented since 2010.
Nor is at all obvious that the pain inflicted has been worth it. In a report published last week, the Washington-based Center for Economic and Policy Research thinktank notes that the financial markets have not been troubled by the UK’s rising national debt, with the interest rate on 10-year government borrowing below 1.5%.
“This is significantly lower than the current rate and projected rate of inflation, which means that the UK government can borrow long-term at real interest rates that are negative. Since there are many public investments that have a positive real rate of return by increasing productivity, this means the economy and the public could benefit from public investment financed at these long-term negative real interest rates.”
Higher investment spending makes a lot of sense. For a start, it would help offset higher interest rates from the Bank of England. It would also provide a much-needed boost to the UK’s struggling construction sector. It would help address the problem of weak long-term productivity growth identified by the OBR. And it would raise activity in the short term, putting the UK in a stronger bargaining position in the Brexit negotiations.
Hammond is in a much stronger position personally than he was a few months ago. He will be able to brush aside suggestions that he could find better uses for his £10bn windfall this year than save it for a rainy day.
But the case for higher investment is being made not just by Labour but also by Hammond’s critics within the Conservative party, such as the MP Nick Boles and Theresa May’s former policy adviser Nick Timothy.
They note that violence in prisons is on the increase and that waiting lists in A&E departments of hospitals are rising sharply. After eight years of austerity, public services are close to breaking point.