My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
Philip Hammond would rather he did not have to present a budget this week. We know that because, in November, he told us so. The spring budget, he said, had outlived its usefulness, providing chancellors with more opportunities to tinker than is healthy. In future, there will be a single budget in the autumn.
His reluctance may also be because, not for the first time, great things are expected within Theresa May’s government, and probably on Tory backbenches, of this final spring budget. The chancellor is expected to apply some hefty sticking plaster to the social care crisis, ease the burden of business rate changes for the hardest hit firms and provide one or two crowd pleasers for households squeezed by the rise in inflation. There is a bigger demand on him, which is to ameliorate the pressure on low-income and vulnerable households from spending cuts.
For the Treasury, this week’s budget carries an added danger. Had the books been closed for a year in November, when Hammond presented his autumn statement, the Treasury would have had little difficulty fending off demands for largesse.
At the time, the Office for Budget Responsibility (OBR) unveiled a cumulative, like-for-like increase in public borrowing of £114bn by 2020-21, compared with its projections last March, mainly due to weaker actual and potential economic growth, and its resulting impact on tax revenues and spending. There was also a smaller effect from deliberate policy actions; mainly increased capital spending by the chancellor. The OBR wiped away George Osborne’s ambitions of achieving a budget surplus; under Hammond there would still be a deficit of nearly £21bn in 2020-21.
There was an even bigger addition to government debt, up £210bn by 2020-21 to £1,950bn. Debt was predicted to rise by more than the increase in borrowing because the Bank of England’s term funding scheme for the banks counts as an addition to debt.
Since then, however, as a result of methodological changes, stronger economic growth than feared and reasonably healthy revenues, the position has improved. The picture unveiled by the OBR this week will be better than it expected in November, with an upgrading of growth and a downgrading of public borrowing, though still considerably worse than it was projecting a year ago.
The Resolution Foundation, a think tank, estimates that the projected improvement in the public finances between now and 2020-21 will £29bn. John Hawksworth at PWC estimates a £45bn cumulative improvement relative to November by 2021-22.
Will the OBR agree? When the latest official figures for the public finances came out a few days ago, the fiscal watchdog took the unusual step of conceding that there will be a significant undershoot this year compared with its November forecast. Instead of the £68bn borrowing it expected then, that points to a new estimate for this year of between £55bn and £60bn.
The OBR also cautioned, however, that this undershoot did not necessarily have implications for borrowing in future years, though it will be surprising if there is not some follow-through to 2017-18 and future years.
So is the way open for Hammond to splash some cash, to spend some of this borrowing windfall? At moments like these, chancellors are like those fictional characters with a devil on one shoulder and an angel on the other, each whispering furiously into the nearest ear.
People will have different views on which is the devil and which the angel in this context but on one side will be those urging Hammond to use his mini windfall to ensure that the government’s tricky task in coming years is not made even trickier by clumsy changes in business rates, deficiencies in social care that are giving the National Health Service an air or permanent crisis, and welfare cuts that look brutal in the context of rising inflation.
On the other are the guardians of the public purse at the Treasury. They know that any improvement in the public finances since November is relative. The big picture is one in which the government is still borrowing far too much at this stage of the cycle and has yet to stabilise debt. The Treasury is also keenly aware that there are uncosted pledges within the public finances. Fuel duty, for example, seems stuck at present levels for political reasons, and that is increasingly expensive. The government has pledged to increase the personal income tax allowance to £12,500 and the higher rate threshold to £50,000, and to cut corporation tax to 19%.
Which voice will be stronger? Hammond is a fiscal conservative. He knows that one way to ensure that Britain maintains the confidence of international investors during the uncertain negotiations that lie ahead will be to demonstrate that the government retains its grip on the public finances. He knows also that there will be difficult times ahead, during which the demands for Treasury largesse will be even greater than now.
He also knows that improvements in the public finances can flatter to deceive. Osborne had a mini windfall from down the back of the fiscal sofa in November 2015, only to see it and more snatched away from him four months later. As Robert Chote, head of the OBR, observed: “What the sofa gives, the sofa can easily take away.“
The underlying picture for the public finances, meanwhile, remains challenging, as discussed here last month. That does not mean there will be nothing in this week’s budget. It does mean that the voices urging Hammond to beware the fiscal chasm will win the battle over those urging him to throw caution to the wind.
And then, in the long run-up to the first of the 21st century versions of single annual autumn budgets, we should have a serious debate on what levels of public spending the country can afford, and where the tax burden – which looks to have an upper limit of around 37% of gross domestic product – should fall. As he put it in his autumn statement, Hammond wants a country committed to “living within our means”. We are a long way from that.