When planning ahead, it’s useful to know what you’re planning for; faced with an uncertain Brexit, Philip Hammond did not have this luxury. However, independent forecasts all point towards a pessimistic few years, and he has responded relatively well.
These forecasts are the first things to note, since they bring chipper, ‘Remoaner’-bashing claims that the economy has grown after Brexit back down to earth. The economy has indeed grown by 0.5%, but that’s less than 0.7% last year[1]. We haven’t left yet, and George Osborne’s brainchild, the Office of Budget Responsibility, reminds us that the consequences when we do leave should not be underestimated. It predicts that GDP growth to 2017 will be 1.4 percentage points lower than expected, based on the uncertain potential outcomes of Brexit. Since Article 50 should be invoked in March 2017, this will be the result of investment hesitating, businesses retreating, migration slowing, productivity stalling and consumption withdrawing from the uncertainty.
Mr Hammond has done what he can to address these problems. First of all, he aims to further reduce the deficit and commit to falling debt[2]. This means he has turned his back on all three of George Osborne’s three goals; having already failed to reduce debt as a share of national income every year and to stick to the cap on welfare spending, he has now reneged on reaching a budget surplus by 2019-20. Choosing new rules was wise in terms of growth; meeting Osborne’s goals may have required harsher austerity, having a particularly punishing effect when coupled with the OBR’s forecasts and higher inflation. However, eyebrows have been raised over the prospects of a higher debt to GDP ratio in 2010-21[3].
Secondly, he has promised to ‘build an economy that works for all’; particularly for those who are ‘just about managing’. Measures include raising the Personal Tax-Free Allowance to £12,500 and the Higher Rate Threshold to £50,000, increasing the National Living Wage for those 25 and over, increasing the National Minimum Wage, and lowering the rate at which benefits are reduced under Universal Credit[4]. These measures may benefit some of the ‘just about managing families’, loosening UC in particular. However, many claim rightfully that increasing the tax-free allowance doesn’t help the poorest[5], particularly those under 25; the Resolution Foundation believes Hammond’s these measures will cover only 7% losses from the planned £12bn in welfare cuts[6].
In fact, the poorest are most likely to be negatively affected due to these cuts: a freeze in working age benefits, tax credits and income support from April 2016. Combined with higher costs of living, inflation and the OBR’s predictions, the next few years look challenging for those already struggling the most. The Institute for Fiscal Studies confirms this; workers will earn fewer real wages in 2021 than in 2008, with forecasts revised down by 3.7% since March. Similarly, the Resolution Foundation has warned that living standards could be worse during this parliament than the last, while the Treasury predicts the poorest 30% households will see a negative impact on their income by 2019-20[7].
However, this fiscal tightening has been combined with spending in an attempt to regenerate slow productivity. The idea is to boost incomes and reduce debt in the long term. Hammond’s £23 billion ‘National Productivity Investment Fund’ include investment in transport infrastructure, housing, future transport technology and research and development. This is a step in the right direction; more productivity means more jobs and higher wages, while innovative industry protects our economy against being ostracised after Brexit. Some claim that the plan is too modest. Still, the Chancellor doesn’t have unlimited means; he has clearly chosen modest spending and modest tightening, with a view to longer term growth. This time, it is the worse off who are bearing the brunt, rather than the richest or corporations.
Hammond has given corporations a tax reduction to 17% in 2020, down from 28% in 2010. This looks like a decision to prioritise the richest over struggling families, but in reality it’s likely that Hammond was trying to prevent business from uprooting to countries within the EU. This may end up improving corporate tax revenues in the long term, allowing the government to extend greater help to struggling families. In a similar vein, he has pledged £400 million from the British Business Bank for growing innovative firms, and cracked down on corporate tax avoidance[8]. At a King’s Think Tank Event, New Economic Foundation’s Olivier Vardakoulias foresaw a Singapore-style business culture arriving in London; low taxes, low regulation, little red tape, all attractive to Brexit-shy investment. This prediction could be coming true.
To conclude, Hammond has done a reasonable job of creating long term gain out of the short term pain of Brexit. Growth in productivity through innovative, long-term industries, should offset the effects of the benefit freezes in the short term. Without some tightening, government investment wouldn’t be possible; but Hammond could look for a less vulnerable short-term revenue base, given prospects for growth and incomes alongside cost of living and rising inflation. Coddling rather than taxing corporations increases the pressure on Hammond’s pro-business measures succeeding; since they rely heavily on confidence form external investors, the government must set out a clear strategy for Brexit, before they retreat any further.
Charlotte Baker is editor at Business and Economics Policy Centre, King’s Think Tank.
[1] ‘Brexit Britain: What has actually happened so far?’ BBC 15 December 2016 http://www.bbc.co.uk/news/business-36956418
[2] ‘Autumn Statement 2016’ HM Treasury 23 November 2016 https://www.gov.uk/government/topical-events/autumn-statement-2016
[3] Wolf M ‘The wages of Brexit are bigger debts’ Financial Times 23 November 2016 https://www.ft.com/content/e87f92ea-b176-11e6-a37c-f4a01f1b0fa1
[4] ‘Autumn Statement 2016’ HM Treasury 23 November 2016 https://www.gov.uk/government/topical-events/autumn-statement-2016
[5] ‘Philip Hammond takes a sober approach to post-Brexit Britain’ FT 23 November 2016 https://www.ft.com/content/ca6e9ef8-b177-11e6-a37c-f4a01f1b0fa1
[6] ‘The Guardian view on the autumns statement: half right, half wrong’ The Guardian 23 November 2016 https://www.theguardian.com/commentisfree/2016/nov/23/the-guardian-view-on-the-autumn-statement-half-right-half-wrong
[7] Peachey, K ‘Autumn Statement: Workers’ pay growth prospects dreadful, says IFS’ BBC 24 November 2016 http://www.bbc.co.uk/news/business-38090977
[8] ‘Autumn Statement 2016’ HM Treasury 23 November 2016 https://www.gov.uk/government/topical-events/autumn-statement-2016