Sunday, March 11, 2018
The deficit's down - but Hammond can't risk a spending spree
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

If I were to allow a robot to take over the writing of this column, something I am gradually working towards, it would take previous known patterns and run with them. So a piece starting with the words ‘the chancellor will this week make a statement on the economy’, would automatically be followed by ‘and we can expect more bad news on growth and borrowing’.

The robot would be blameless. I have written something like that so often that, even under human control, I am struggling to prevent the keyboard from doing so again.

But not this week. On Tuesday, Phillip Hammond will deliver his spring statement. Advance briefing suggests it will be short, no more than 15 minutes or so. Though it is roughly on what would be budget day in normal years, it will lack most of the usual paraphernalia. It will not, the Treasury says, be a “fiscal event”, in other words there will be no important tax and spending decisions (though the option to include some exists). That is why my inbox, usually creaking with budget submissions and predictions, has been empty of such things.

The spring statement will nevertheless contain good news. Growth this year and next will be forecast to be a little higher than the Office for Budget Responsibility (OBR) predicted in November. Instead of the 1.4% growth for this year and 1.3% for 2019 predicted then, consensus forecasts point to figures of 1.6% and 1.5% respectively, perhaps even a little higher. Growth over the next few years is still likely to be a little weaker than the OBR predicted in March last year but it is heading in the right direction.

Even more dramatic will be the figures on government borrowing, the budget deficit. Instead of the £49.9bn the OBR expected for this year, 2017-18, in November, and the £58.3bn it predicted a year ago, the deficit is likely to come in at around £40bn.

The greater significance of this is that it will show that the deficit is 2% of gross domestic product or below, a level not seen since 2001-2. The current budget deficit, borrowing excluding public investment – spending on the infrastructure and so on – has been eliminated.

Achieving that, which again has not happened since the early 2000s, was George Osborne’s original aim in 2010. It has come about three years too late, and it was superseded by a tougher target of getting to an overall budget surplus. But it is a milestone nonetheless.

It raises a couple of questions. Was the austerity needed to get the deficit down worthwhile? And, with the deficit down to a level which bothers nobody very much, is it time for the government to start spending a lot more?

First, for those who are unaware of the history and wondering why it is necessary for the chancellor to be on his feet at all this week, a brief recap. For the past 40 years or so, since the 1975 Industry Act became law, the government has been required to publish two economic forecasts a year.

One of those occasions has been provided by the budget, though its timing during the year has varied. The other has come under various guises. In the second half of the 1970s and the early 1980s it came in what was called an economic progress report. That gave way to the autumn statement, which was abolished in favour of a single autumn budget, with effect from 1994, so the then Tory government published a separate summer economic forecast.

Under Gordon Brown in 1997, the budget shifted back to the spring, but the pre-budget report in the autumn provided an opportunity to publish the forecast. George Osborne renamed that the autumn statement before Hammond went back to the Kenneth Clarke model of a single autumn budget. This week’s is the first ever spring statement but, given the penchant chancellors have for rearranging the fiscal furniture, there can be no guarantee that the musical chairs will stop here.

That the deficit is down to levels considered appropriate by Osborne in 2010, after a lot of pain, has sparked a renewed debate about whether it was worthwhile. Some argued that austerity should have been delayed until the economy was on the sunlit uplands of significantly stronger growth, while some said there should have been no austerity at all.

Both arguments, it seems to me, are flawed. Delaying would have taken us, not into the sunlit uplands, but the uncertainties of Brexit. Doing nothing against the backdrop of a budget deficit of £153bn, 9.9% of gross domestic product, was never an option. The growth numbers for 2010-15, averaging just over 2% a year, were perfectly respectable and compared well with other countries. Employment grew well and unemployment fell.

During the Osborne years it was common, particularly among some US economists, to see austerity as a kind of mad British exceptionalism. There may be a mad British exceptionalism but it was not that; America’s growth over the same period was barely any different to that in Britain. Both did a lot better than Europe, weighed down by the eurozone crisis and recession.

Is now the time to abandon austerity? Local authorities are creaking under the strain and the cash freeze on most benefits and tax credits, set to last until 2020, is biting hard. The National Health Service, missing its target, is experiencing the slowest spending growth in its history.

Sometimes, the Treasury’s determination to avoid extra spending leads to convoluted policy, such as the latest damp squib on housing a few days ago. I have long argued that if the government is serious about addressing housing shortages, and wants to get anywhere near its target of 300,000 new homes a year, it will have to take a leaf out of Harold Macmillan’s book and fund the building of a lot more council houses.

The Treasury, however, appears determined to hold the line, and has good reasons for doing so. Though this year’s borrowing undershoot will carry through to future years, we are a long way from a balanced budget on a sustained basis, or a reduction in government debt, currently £1.74 trillion, or 84% of GDP. Even if you say it quickly, that is a lot of debt.

The Treasury also fears, quite rightly, what lies ahead for the public finances. The OBR has long highlighted the upward pressures on borrowing from the early 2020s, largely due to the impact of an ageing population on health, pensions and other spending.

The government’s Brexit impact assessments, now published, show that annual borrowing will be between £20bn and £80bn higher than under the status quo by the early 2030s, reinforcing the Treasury argument for caution. That red Brexit bus could hardly have been more misleading.