In normal times, the first budget after a general election is a predictable affair. The chancellor of the exchequer stands up, conjures up the ghost of Sir Stafford Cripps, administers some pain and quickly moves on.
In Westminster it is known as aligning the economic and political cycles. In plain English, it means getting the bad news out of the way early in order that there will be money to spare just before voters have to go to the polls again. Only rarely do governments deviate from this approach and when they do it rarely ends well.
But these are not normal times. It is simply not possible for Philip Hammond to raise taxes in the hope that, given time, the public will have forgotten all about it. This is a minority government that might not go the distance and, rather like Denis Healey in 1974, Hammond has to prepare for the possibility that there will be another election before too long.
What’s more, the reason it might not survive until the scheduled end of the parliament in 2022 is that a good chunk of the public decided in June this year that it wanted more houses built, more money spent on the NHS, less-crowded trains and better roads – the things Jeremy Corbyn said they could have if the government was prepared to borrow to invest and to tax the rich more heavily.
The shadow chancellor, John McDonnell, thinks the tide turned against austerity during the course of 2016, partly because the public wearied of cuts and partly because Labour articulated an alternative. Whatever the reason, the tide has turned at an inopportune moment for Hammond.
Unexpectedly strong employment growth has meant the short-term outlook for the public finances is better than the chancellor thought it would be at the time of the last budget in March. There will not be much for Hammond to boast about because Britain has slipped from the top to the bottom of the G7 growth league table, but he will at least be able to say that the deficit in the current financial year has comfortably beaten expectations.
But that is not the real issue. Hammond’s problem is that things look much worse in the years to come.
The reason for that is that the independent Office for Budget Responsibility – to which the Treasury has outsourced economic and fiscal forecasting – has decided that the financial crisis caused permanent damage and that, as a result, the economy will never return to its pre-crash levels of growth.
Ever since it was created in 2010, the OBR has expressed confidence that the virtual flat-lining of productivity – broadly speaking the improvement in the UK’s economic efficiency – was a temporary phenomenon caused by a particularly deep downturn. Sooner or later, the OBR thought, there would be a bounce-back in productivity to about 2% a year.
After years of being proved wrong, the OBR now thinks productivity growth will average only 1.5% a year. While that doesn’t sound much, it will have a significant cumulative impact on the public finances. Weaker productivity limits the economy’s ability to grow without inflation breaching the government’s 2% target, and that in turn means a smaller tax take and bigger deficits.
Hammond has pledged to abide by a self-imposed fiscal rule whereby the structural budget deficit – the part unaffected by the ups and downs of the economic cycle – is below 2% of national output (GDP) by 2020-21, and in March was on course to achieve this with £26bn to spare. At a stroke, the OBR will remove two-thirds of the buffer the chancellor thought he would have to see the economy through the Brexit process.
Hammond is, therefore, being asked to do more just when the OBR is limiting his room for manoeuvre, and it is this mismatch which makes the budget so testing.
Alistair Darling delivered his 2008 autumn statement and 2009 budget against a back drop of an imploding economy and crashing tax receipts but at least knew there was no alternative but to break the then Labour government’s fiscal rules by borrowing more.
It is not nearly so simple for the current occupant of 11 Downing Street. Hammond could come up with the sort of giveaway package that Tory backbenchers are eager for, but only if he is prepared to break his fiscal rule. He is reluctant to do that, even though he is coming under pressure from his own backbenchers as well as McDonnell to do so.
Alternatively, he could play it ultra-safe, using the gloomy productivity estimates from the OBR as a pretext. He is not keen on that option either. Nor, it is clear, is the prime minister, who behind the scenes has been pressing for bolder action in the budget.
Hammond has signalled that the budget will be balanced. That means a bit more spending in sensitive areas – the NHS, housing and transport – but matched by revenue-raising measures elsewhere. He will try to address the reasons the Conservatives lost their overall majority in the election while at the same time sticking to his fiscal rule.
But this is tricky stuff, because with limited scope it is impossible to please everybody. It is the trickiest budget for a generation.
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