There is “light at the end of the tunnel,” said Philip Hammond, while delivering yesterday’s Spring statement. The Chancellor ruled out an immediate spending spree but pointed to rises in the future – possibly as soon as the time of his autumn Budget statement.
This makes political sense. If Theresa May is going to survive the Brexit process, remaining Prime Minister until 2022, it makes sense for the Tories to “backload” spending rises until nearer that election. Hammond, though, could have made more noise about the cash Britain is spending, and plans soon to spend, to prepare for leaving the European Union in March 2019.
The overall message of this Spring statement – “jam tomorrow” – while politically savvy, makes economic sense too. Hammond was wise not to open the spending sluice gates. The outlook for the UK’s public finances is a little stronger than in last November’s Budget, but not much.
The broad picture is of a relatively sluggish economy, with real GDP growth averaging just 1.4pc over the next five years – compared to 1.7pc in 2017. While public borrowing is finally expected to drop steadily as a share of GDP, the fall is modest – from 85.6pc this year to 77.9pc in 2022-23. Back in 2000, prior to Gordon Brown‘s spending splurges and the 2008 financial crisis, the UK’s national debt was just 30pc of GDP. Between now and 2022-23, the amount of debt in money terms will keep rising – from £1,783bn to £1,893bn.
It was welcome this Spring statement was a low-key affair – with no changes to tax and spending, just a 26-minute speech and no obvious impact on the financial affairs of households and business. One big set of tax changes a year is quite enough – and these will, from now on, happen each autumn. That would be true at any time, but is particularly important during the ongoing Brexit talks.
While the Chancellor has been bitterly criticised for not spending more there are solid reasons why not. There is, indeed, “light at the end of the tunnel”. But it could be the headlamps of an oncoming train.
A major danger is posed by global financial markets that are extremely overvalued and therefore fragile. Only last month, the bellwether Dow Jones Industrial Average of leading US stocks plunged 5pc in a single day, its worst drop in six years.
The chances of another fiscally disastrous systemic collapse are heightened, also, by ongoing efforts by the world’s leading central bankers to wean markets off the financial drug that is quantitative easing. That’s why it’s right for a country like the UK, heavily exposed to financial market vagaries and with still vast private and public sector debts, to reduce its liabilities – not borrow more at the first sign of meaningful fiscal improvement.
It is worth remembering – and I would have liked to hear Hammond mention this – that the UK hasn’t run a budget surplus since 2001. Our government has spent beyond its means, loading liabilities on future generations, in 52 of the last 60 years. Even when government borrowing costs are kept artificially low by QE, more than £55bn of taxpayers’ money was spent on debt interest last year – more than we spend on state schools. And as interest rates rise, those interest costs can only increase.
The pound did, indeed, strengthen slightly after Hammond’s statement, not only on confirmation of no additional borrowing but also improved economic forecasts – in particular the expectation that real wages will now rise. That, though, makes interest rate rises more likely, increasing borrowing costs not only for government but firms and households too.
The big disappointment of Hammond’s speech, to my mind, related to Brexit. Ahead of the Spring statement, European Commission president Jean-Claude Juncker yesterday warned the UK will come to “regret” the decision to leave the EU. It would have been useful if the Chancellor, too, could have indulged in a bit more EU-related rhetoric, giving Brexit more prominence in his Commons set piece. Hammond should have outlined in more detail the preparations Britain is making to leave the EU, whether Juncker and his pals end up granting the UK a post-Brexit free trade agreement or not.
With the commission still determined to “punish” the UK for political reasons, even to the extent of blocking a free trade agreement that benefits the EU27 economies more than us, highlighting our preparations would have made tactical sense.
“Britain is happy to trade with the EU under no deal,” Hammond should have said. “And we will be completely ready for no deal, if that’s what transpires.”
An update on such preparations would also, I believe, have been welcomed by all but the most ardent Remain voters in the UK – that is to say, the vast majority.
The Government needs to ensure that smooth customs and border arrangements are in place by March 2019, whatever the outcome of the talks. That means spending money on new customs systems and physical infrastructure at ports and airports – as well as fishery patrol vessels.
Hammond set aside £3bn for Brexit-related changes in the autumn Budget, and there were some technical documents yesterday, but there has been little public update. The public – and the EU – need to hear loud and clear these vital preparations are taking place.