It may not have been hugely noticeable, but Philip Hammond was making an effort to be more upbeat at this year’s Tory conference. Attacks on him as the “Eeyore chancellor” for his gloomy Brexit outlook had convinced his team that he needed a note of positivity – so he began talking up the “Brexit deal dividend” that would come when a good agreement was reached with the EU.
Yet even during chats with MPs at the febrile event in Birmingham, colleagues were left in no doubt about his priorities. He was clear that whatever the potential gains in the future, now was not the time for a spending splurge. Brexit made everything far too unpredictable.
Unfortunately for the chancellor, the one person who didn’t seem to get the memo was the prime minister. In a surprise to the conference hall – and a good few Treasury officials – Theresa May announced that after years of painful cuts, she would be “ending austerity”.
Arguments now rage inside the government about what May meant by this grand declaration. It was meant to refer to next year’s overall review of spending, they say. Others claim she was trying to make a gesture, having seen internal polling showing how the cost of living had been hitting the Tory ratings over the last six months.
What is without doubt is that such a pledge has left her cautious chancellor facing a precarious balancing act at tomorrow’s budget. He must show willing in meeting the prime minister’s pledge – while keeping as much firepower in reserve to deal with Brexit fallout.
Even cabinet ministers deeply opposed to his Brexit outlook have sympathy. “The problem is that the chancellor now has to spray around the sweeties,” said one party veteran. “He just can’t do it.”
Ever since May’s announcement, there has been a queue of ministers at his door. Various groups of MPs are now sure they have won money for their pet projects. There will be £500m for defence, one group says. Additional money will be announced for social care, another group has been assured. A large group of Tories also says it has been promised more than £1bn in additional funding for universal credit.
That is all on top of the measures imposed on the chancellor by No 10, including a £20bn-a-year increase in NHS spending. A freeze in fuel duty will cost the Treasury some £800m next year alone. Meanwhile, Hammond has to fund a £1bn scheme to let local authorities borrow more to build council houses.
He has already announced help for the high street by cutting business rate bills by a third for half a million small shops in a package costing £1.5bn. His budget will also contain a £30bn road-building programme from 2020 to 2025.
Last week Hammond received a major piece of good news: he is in line for a £13bn annual windfall from a better-than-expected tax take. This should help long-term commitments on health and social care. However, Catherine Colebrook, chief economist at the Institute for Public Policy Research, warned the chancellor: “The trouble is that the rosy forecast for the public finances is just that – a forecast, and forecasts tend to have a short shelf life. Rather than taking a punt on a favourable forecast coming in, he should revisit his approach to taxation.
“Inheritance tax should be scrapped, and replaced with a lifetime gift tax, such that a person can receive up to £125,000 of gifts over their lifetime tax-free, but pay tax on any additional gift income.”
Tory MPs angry at Hammond for pushing a soft Brexit have already indicated they would not accept raising personal taxes further, so relatively painless targets are being examined – but anything that can be put off until next year will be kicked down the road. A clampdown on workers and companies using self-employed status to dodge tax, a cut to a national insurance discount scheme to incentivise jobs and a tax on digital companies which gather and deploy data are all being examined.
Hammond’s dilemma could soon end up being a problem for May. Even a conservative estimate of what ending austerity would mean suggests an additional £19bn in spending by the end of the parliament – a measure against which the prime minister’s promise will be judged. That figure ignores obvious austerity measures like the freeze on working-age benefits. The Resolution Foundation says some £31bn a year extra would eventually be needed for a meaningful end to austerity.
One former cabinet minister said the end of austerity commitment was a “big error… sorry, make that the latest big error”. The frustration among some ministers is that in making the announcement, May has “used Labour’s language” and entered into a spending battle with Jeremy Corbyn’s party that she can never win.
When it comes to the effects of austerity, many will judge her on welfare. According to the Resolution Foundation thinktank, welfare cuts announced by George Osborne in 2015 will cost affected families in the north west £900 a year by 2023, or 2.5% of their income. They will cost families in London £1,000 a year, and £800 annually for families in Wales, Yorkshire, Northern Ireland and the West Midlands.
“If ending austerity is to mean anything it has to mean calling time on these drags on living standards by scrapping the benefits freeze and the cuts to universal credit that mean there are many more losers from the new benefit than winners,” said Adam Corlett, the foundation’s senior economic analyst.
John McDonnell, the shadow chancellor, thinks the prime minister has “set up” her chancellor. Worryingly for Tory unity, it is a theory that carries some currency with senior Conservatives. “There is an element of that he was down for the chop before the 2017 general election,” said one. “That is worth bearing in mind.”
Indeed, a growing number of Tories believe this budget could be Hammond’s last. Once Brexit is secured, many expect May to reshuffle her top team in an attempt to show she is turning her attention to her domestic agenda. Hammond is again seen as at risk.
Those who know Hammond best say that it is simply not in his character to go for broke when so much economic uncertainty lurks. The difference between a soft Brexit and no deal is worth around £15bn over the next five years, according to the National Institute of Economic and Social Research. Whatever course Hammond charts tomorrow, the winds of Brexit could force a dramatic change of direction just a few months down the line.
