Brexit and the Budget: Hammond pressed to go ‘big and bold’

Brexit and the Budget: Hammond pressed to go ‘big and bold’

The British government’s fragility, including its Brexit divisions and a slowing economy, is coming into sharp focus as the chancellor’s speech approaches

Theresa May promised to give a “voice to the voiceless” but Britons are still waiting to hear what she has to say almost six months after her ill-fated snap election. Struggling with Brexit and a cabinet riven by resignations and allegations of personal misconduct, Mrs May was literally unable to explain her mission when she lost her voice during a calamitous Conservative party conference speech last month. Now she is looking to her chancellor, Philip Hammond, to articulate her government’s purpose when he delivers his Budget on November 22.

Hemmed in by extraordinary political and economic constraints, Mr Hammond has grown alarmed by the pressure to deliver a big-spending Budget that could rescue the prime minister’s floundering government. “This Budget has got to be big, it’s got to be powerful, it’s got to be revolutionary,” an unnamed senior government source told The Sunday Times last month. “People are very clear that it is basically the last chance.” Mr Hammond’s allies despair: “We’ve got no idea where this stuff is coming from,” says one.

Mr Hammond favours caution. It derives not just from his fiscal conservatism, collapsing productivity forecasts and a conviction that Brexit is an immediate threat to the economy. He also knows he has a target on his back and that Eurosceptic Conservative MPs and even cabinet ministers are waiting for him to mess up a second Budget in a row.

A leading advocate of a “soft Brexit” and of Britain retaining strong links with the EU, Mr Hammond tells friends that some of those who want him to deliver a “big and bold” Budget are among those who hope it will blow up in his face, just as his March Budget did when he had to abandon plans to increase national insurance payments for the self-employed. Last month pro-Brexit Conservative MPs briefed the press that Mrs May should sack the chancellor.

“We need a can-do man at the Treasury, not a prophet of doom,” said Nadine Dorries, a Tory backbencher. Pro-Brexit ministers Boris Johnson and Michael Gove were revealed at the weekend to have written to Mrs May last month claiming that unnamed ministers — assumed to refer to Mr Hammond — were not preparing for a “no deal” Brexit “with anything like sufficient energy” and would leave Britain “over a barrel”.

In short, next week’s Budget has become the battlefield for all the government’s mounting problems: the ferocious cabinet divisions over Brexit, a weakening economic outlook and the prime minister’s fragile authority. Any controversial Budget measure can be voted down in the Commons if fewer than 10 Tory MPs side with the Labour opposition; suffering such a defeat would be calamitous but might give Mrs May the excuse to execute her plan — abandoned after she lost her authority at the election — to sack her chancellor. “There’s no room for manoeuvre,” admits one close colleague of Mr Hammond.

Parallels are being drawn to the plight of John Major’s Conservative government of the 1990s that limped on without any apparent purpose for years to certain defeat. Gary Streeter, a Tory MP and whip in the Major government, tweeted: “Feels increasingly like 92-97 parliament: no majority, no money, ripping ourselves apart over EU.”

There is little doubt the government needs a convincing Budget. Nick Boles, a Conservative MP and former minister, says: “The government is like a bicycle — unless it’s moving forward, it falls over. At the moment it’s looking wobbly.” The only problem is that Mr Hammond is under pressure from Tory MPs to steer in opposing directions. Fiscal hawks such as Andrew Mitchell, former chief whip, want Mr Hammond to stick to his rules. “He is genuinely between a rock and a hard place,” he says.

“The one thing he has to avoid is any suggestion that the policy of austerity is somehow optional. It is not. We have to show the markets a clear road map back to living within our means.” But Robert Halfon, the party’s former deputy chairman, sums up the desire among many Tory MPs for something bold. “The Budget is the most important event since the election. It’s a chance for the government to be radical, to deal with the most important issues facing the country: skills, housing, cost of living, the NHS and social care. Safety first will be the wrong approach,” he says. Mr Hammond favours the first course. Although he will find money for some priorities, the chancellor sees little political gain in trying to outbid Jeremy Corbyn’s Labour party on spending.

Following a cut in the UK’s credit rating by Moody’s in September, Mr Hammond has told colleagues he fears more of the same if he loosens his grip on the public finances. With exit talks in Brussels stalled and the cabinet split on what sort of future relationship Britain should seek with the EU, the chancellor’s allies insist this is not the time to unsettle investors by ripping up fiscal rules announced only a year ago. He is committed to reducing borrowing to less than 2 per cent of national income by 2020-21 and to eliminating it altogether by the mid-2020s.

Although the Treasury’s pre-referendum forecasts of an immediate economic slump if Britain voted to leave the EU proved wildly inaccurate and have been ridiculed by Brexiters, Mr Hammond’s department has not renounced its longer-term projections. They forecast that if Britain left the EU under a Canada-style bilateral free trade agreement focusing on goods not services, after 15 years the country’s gross domestic product would be about 6 per cent lower than if it had stayed in the bloc and the exchequer £36bn a year worse off.

Under an orderly “no deal” scenario, under which Britain traded with Europe under World Trade Organisation rules, GDP might be 7.5 per cent lower and the coffers £45bn emptier. The constraints on the chancellor are daunting. While Mr Hammond’s fiscal watchdog, the Office for Budget Responsibility, is planning to revise down its forecasts for economic performance, a range of spending commitments have been made since March and backbenchers are demanding even more public spending across government.

Tax receipts have been ahead of forecasts so far this year. But that is where the good news stops. The OBR has said it will “significantly” revise down its optimistic forecast for UK productivity growth. If it matches the Bank of England’s assessment that the economy can sustainably grow at a rate of only 1.5 per cent a year, that would entail a downgrade to growth forecasts amounting to half a percentage point a year. The Institute for Fiscal Studies estimated that on this basis, even including good news already in the public finances, half of Mr Hammond’s 2020-21 headroom would disappear.

At the same time, many parts of the public sector are feeling real pain seven years into budget cuts. Emily Andrews, senior researcher at the Institute for Government, says the Treasury had been “ignoring warning signs, allowing problems to mount and then reacting with emergency cash in response to operational or political crisis”. Simon Stevens, the head of NHS England, warned of the need for an additional £4bn every year, although Whitehall officials think they can avoid the crunch for a few more years.

“Hospitals cannot afford to treat patients for the amount they are paid to do so, but the Department of Health cannot afford to pay them any more,” says Sally Gainsbury, senior policy analyst at the Nuffield Trust. Across government, staff are facing big real pay cuts this year because with inflation rising to 3 per cent, the 1 per cent cap on pay rises will bite harder than was planned. If Mr Hammond raises pay in line with inflation, the total bill would be a further £6bn year.

Taken together, the weaker forecasts, commitments made and public spending pressures are easily enough to wipe out Mr Hammond’s fiscal rule. Some say he should do that since the government can borrow cheaply and a 3 per cent budget deficit, for example, is not large compared with recent years. But the chancellor and his allies are conscious that there is a difference between breaking a fiscal rule when there is no alternative and allowing one to slip when the headline economic news has not been that bad. It would look like he had no grip on the nation’s finances at a crucial time for Britain.

Mr Hammond’s caution is renewing tensions between the chancellor and Mrs May; during the election campaign she did nothing to dispel the idea that she intended to sack him as soon as the votes had been counted. In a dysfunctional cabinet, this is the most important dysfunctional relationship of all.

Before the election someone close to the chancellor described Number 10 as “economically illiterate”. Nick Clegg, the former Liberal Democrat deputy PM, says he cannot recall Mrs May ever making a significant cabinet contribution on the economy during his five years in coalition government. Mrs May’s aides, for their part, regarded Mr Hammond as obstructive and “vain”, and someone who could not be trusted in the election campaign. Even today one friend of the prime minister says: “I still don’t know what his economic policy is.”

Things have not improved since the election. Mrs May wants housing to be the Budget’s centrepiece and to spend more on construction but Mr Hammond believes the best way to build more homes is to radically loosen Britain’s planning laws. Mrs May, who represents a constituency in the London commuter belt, refuses to sanction a big expansion of housebuilding on green fields, while Mr Hammond refuses to pump tens of billions of pounds more into the sector. “They can barely bring themselves to talk to each other any more,” says one cabinet minister.

Gavin Barwell, the popular former housing minister and now Mrs May’s chief of staff, is working with the Treasury to find common ground. Mr Hammond will find money to pay for priorities — notably measures to raise productivity — but the expectation is that the Budget will fall short of the transformative event Mrs May had envisaged.

One Treasury insider says: “There’s no objective reason why we should be having a spending splurge.” Rupert Harrison, chief of staff to former chancellor George Osborne, says: “Given the context, you have to get through the day without it unravelling. They need something solid — it doesn’t have to be great.”

Mrs May is being urged by senior Conservative MPs to overhaul her cabinet radically after the Budget, perhaps sacking the accident-prone Boris Johnson as foreign secretary and finally carrying out her plan to axe Mr Hammond. But such a strategy would be risky in the extreme, as Brexit talks near their climax. Even Alistair Darling, the former Labour chancellor, argues that Mrs May can ill-afford to lose her chancellor. “He’s one of the grown-ups around the cabinet table who understands the difficulty Britain finds itself in,” he says.

George Parker & Chris Giles

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