Hammond delivers early Budget amidst Brexit uncertainty
Philip Hammond will break with tradition next week and deliver the first Monday budget since 1962. Budget statements normally take place on Wednesdays, which would have meant a Halloween clash that presumably didn’t appeal to the media planners. But the bigger factor in the Chancellor’s timing is Brexit, with the budget pulled forward by almost a month to avoid running into the likely ‘end game’ in the negotiations.
The influence of Brexit will nonetheless be felt, with the considerable uncertainty over a deal encouraging caution and a ‘lighter’ budget than might otherwise have been the case.
That said the Prime Minister has already made a number of commitments that put pressure on the Chancellor to loosen the purse strings. In her conference speech in Birmingham the PM announced that fuel duty would once again be frozen and reiterated her commitment for an extra £20bn in NHS funding. Most significantly, she signalled that the UK would soon see an end to austerity. Such commitments come with a large price tag.
According to the Resolution Foundation, “An ‘end-of-austerity’ package that ensures that no department need face any further cuts in real-terms per capita spending beyond 2019-20, alongside cancelling the final year of the four-year benefit freeze and re-investing in the work allowances that underpin the new Universal Credit (UC) system would cost around £31bn in 2022-23.”
An unexpected £13bn boost from revised OBR forecasts has eased some of the fiscal pressure on the Chancellor, particularly in finding the money to pay for increased NHS spending in the short term. But the long term challenge is great, particularly if Mr Hammond wants to stick to his goal of ensuing that debt will fall as a share of the economy.
Meeting that target whilst also ending austerity can only be achieved through significant tax rises, most likely through a cancellation of corporation tax cuts, cuts to pension tax relief and potentially action to freeze income tax thresholds. However it is unlikely that the Chancellor will make any such moves at this point. The febrile political atmosphere in the Conservative Party means that the Chancellor cannot risk difficult votes on the floor of the House meaning his room for manoeuvre is extremely limited. This will leave space for Labour’s John McDonnell to maintain political pressure for “fair” tax rises to fund higher public spending.
The Chancellor will want to deflect some of that attack and we may see new measures including a digital sales tax aimed at new tech firms who are impacting on traditional high street retailers. More generally, though, he may use the budget to signal that austerity could be ended by a Brexit “deal dividend”, as part of the political positioning needed to get Tory MPs behind a final agreement with the EU. Hammond recently stated that a successful deal would also allow him to release the “slightly larger fiscal buffer” the Treasury has held because of the uncertainty of the Brexit process, providing another “bonus” to the economy.
Fundamentally however the Chancellor will be looking to avoid any pitfalls that could detonate when the Commons comes to vote on the budget and approve a financial bill. With Eurosceptic Tory MPs in open rebellion and the government’s allies in the Democratic Unionist Party prepared to cut up rough, an essential part of Hammond’s budget will be avoiding unnecessary controversy whilst including enough incentives to get his own side on side.