The Telegraph: For the real Budget we must wait till Brexit – but it could be a humdinger

For many years Budgets clashed with the running of the Champion Hurdle at Cheltenham, with the Chancellor rising to his feet as the tapes went up. This year, Mr Hammond’s big speech on Wednesday again coincides with the Cheltenham Festival but it is a day later than the traditional slot. So devotees of tomorrow’s great race will be able to watch it undistracted. Mind you, the speech is likely to be so dull that you might reasonably absorb yourself in studying the form for later races.

In other respects too this will be a very different occasion. Mr Hammond has swapped the roles of the traditional Spring Budget and the Autumn Statement so that what we used to expect in March we can now expect in November. By contrast, the traditional Budget slot should now do what the old Autumn Statement used to, that is to say, give an updated economic and fiscal forecast.

That said, in recent years, Autumn Statements have tended to include substantive measures on both tax and spending, to the point where they were threatening to become budgets in all but name. I suspect that this week’s statement would have been due for the same fate were it not for the overwhelming influence of our old friend, Brexit uncertainty. Neither we nor the Chancellor have a clue about what is going to happen on March 29, or later. Moreover, the Budget speech is sandwiched between yet another “meaningful vote” on Mrs May’s “deal” and further votes on a no-deal Brexit and a Brexit delay.

Accordingly, even if Mr Hammond were minded to make this statement a more substantive one, he surely wouldn’t know what to do. He would be well advised to do nothing.

At least he will be able to report a continued improvement in the public finances. Borrowing this fiscal year is running at about half of what it was last year. On the face of it, this gives the Chancellor more room for manoeuvre. Unfortunately, though, things are unlikely to be so simple.

The Office for Budget Responsibility (OBR) may well assume that the borrowing numbers have been flattered by one-off factors. Moreover, recent economic news has been disappointing, suggesting that over the next several months tax receipts may be weaker than they have been. The OBR is likely to reduce its forecast for GDP growth this year from 1.6pc to 1.3pc. Nevertheless, on last October’s figures the Chancellor had some £15bn in hand to meet his objective of reducing the structural budget deficit to below 2pc of GDP by 2020/21. It is possible that the OBR will acknowledge that he now has rather more up his sleeve.

But this is where Brexit comes in. Mr Hammond is a fully paid-up member of the Remainer tendency. The nearest thing to remaining in the EU is Mrs May’s ghastly “deal”. He apparently believes that if we adopt it then the economy will perform much better than if we don’t. He will argue that it would allow a resurgence of both investment and consumption, thereby improving the public finances decisively. That would allow him to “put an end to austerity” in the Autumn Budget and might even leave some room for tax cuts.

A substantial delay to Brexit would prolong uncertainty but at least it would postpone, and perhaps avoid, the losses that the Chancellor believes a no-deal Brexit would cause, involving a contraction of GDP, leading to reduced tax revenues. In these circumstances, if he were to try to stick to his fiscal rules he would have to cut expenditure and/or increase taxes.

Yet he has made it pretty clear that he would do neither of these things. Rather, he would bring in emergency measures to help the economy withstand the blow from a no-deal Brexit. Consequently, if we end up in this situation then we are likely to experience a real humdinger of a mini-Budget, reminiscent of the old days. There would be umpteen measures and substantial amounts of money doled out. Tariff policy would be critical. The Government could decide to impose tariffs on our imports from the EU at the same rates at which they are currently imposed on imports from non-EU countries. In this case, the Chancellor would have to return to consumers the money raised, either by reducing particular tariff rates or by introducing an across-the-board reduction in VAT.

If, on the other hand, the Government decided to slash tariffs to virtually zero on almost everything then there would be no extra revenue flowing into the Exchequer and no squeeze on consumers. Indeed, they would benefit from the lower prices of goods imported from outside the EU.

But this would pose a competitive threat to some UK producers. The Government would surely feel that it needed to provide targeted assistance for particular industries in the forefront of this competitive battle.

Mind you, I reckon that Mr Hammond and his Treasury are much too pessimistic about how the economy would perform in the event of a no-deal Brexit.

Within six months I expect us to have bounced back from whatever short-term difficulties we have experienced and the economic growth outlook to be good. In that case, of course, Mr Hammond might think that he had made a mistake by giving so much support to the economy. But he might no longer be Chancellor. The strong economy would lead to higher tax revenues and it is likely that a new Chancellor, following a tax-cutting agenda, would not want to tighten policy.

So, one way or another, I suspect that a fiscal relaxation is on the way. What the Brexit outcome will affect is whether the relaxation is consistent with continued low borrowing or whether it causes the fiscal rules to be suspended or abandoned.

He may have avoided competing with the Champion Hurdlers, but over the coming weeks Philip Hammond will have many treacherous obstacles to traverse.

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