At 12.30pm on Wednesday Philip Hammond will step up to the House of Commons despatch box and deliver the UK’s first Autumn Budget. The long tradition of the Spring Budget will thus come to an end. But some of Hammond’s colleagues in the Conservative Party are warning that it could be the end of the road for him as Chancellor too.
Hardline Tory Brexiteers, affronted by Hammond’s cautious approach to leaving the European Union, are pushing for him to be replaced with an enthusiast for the project. And then there is the competence factor. A national insurance increase for the self-employed in the March Budget was withdrawn on Downing Street’s orders within weeks, in an epic humiliation for Hammond. If this Budget similarly unravels it is hard to see how he could carry on.
The overall economy is slowing as higher inflation bites into household wages, which are still growing only feebly, and as businesses sit on their hands rather than invest due to the uncertainty created as Brexit approaches in 2019. That context inevitably limits Hammond’s room for manoeuvre against his self-imposed fiscal rules.
Yet the political bomb that went off at the June general election, robbing the Conservatives of their expected majority, has scrambled politics and created huge pressure for more spending. Even many Conservatives are calling for the Chancellor to ease austerity in order to take the wind out of the sails of the Labour Party under Jeremy Corbyn.
So the personal stakes are high, the economic outlook is uncertain and the political scene is unusually fluid. So what are the big issues to look out for on Wednesday? How is Hammond likely to approach them? And what numbers should we pay particular attention to?
Ministers have been talking up their plans for a large expansion of house building to address what they now accept is a UK “housing crisis”. The Communities Secretary Sajid Javid has been lobbying for a substantial increase in public borrowing to deliver more homes and promised last week that the Budget will show “just how seriously we take this challenge”.
The Treasury has flown a kite of a stamp duty cut for first-time homebuyers. But what really matters is how much state money will be put into supporting housing construction, after the relatively modest sums announced during the Tory party conference in October were widely dismissed as inadequate. Housing associations will be looking for significantly more grant money to enable them to build more social housing for rent.
Local authorities seem likely to win permission to borrow to start the construction of council housing again after it effectively ground to a halt in the 1980s. But keep an eye on how much additional council borrowing will be projected by the Office for Budget Responsibility to gauge how significant this loosening – and therefore housing delivery by local authorities – is expected to be.
Public sector pay
The Conservatives’ 1 per cent cap on public sector pay has already been lifted for prison officers and police. But the pressure to ease it for teachers, nurses and other public servants is now intense, especially with multiple warnings over recruitment.
Yet lifting the cap will not be cheap. The Institute for Fiscal Studies calculates that allowing wages to grow in line with inflation would cost around £6bn extra by 2019-20. The unions are demanding even more – a 4 per cent rise. If the Conservatives do relax the cap substantially this will have an immediately obvious impact on the public borrowing projections.
Labour enjoys a huge polling lead among the under-40s, largely thanks to Jeremy Corbyn’s striking promise to abolish tuition fees and ambition to “deal with” their debt burden. In response, the Government has already made the tuition fees system more generous. And there have been some suggestions that the Chancellor in the Budget might cut national insurance contributions for younger workers, financing it by restricting pension tax relief for older workers. But the big question is whether such incremental reforms will draw attention away from Labour’s simple, eye-catching, offer to the young?
Cuts to working-age welfare and universal credit put in place by the previous Chancellor George Osborne were set to bite over the coming years, and are projected to push up inequality and poverty. There have been signals the Chancellor will cut the contentious six weeks that recipients of universal credit must wait. This will cost some money, but the bigger question is whether Hammond will defray the overall package of cuts.
A key number to look out for is whether the £12bn of savings projected to come from the welfare budget over the next five years actually comes down or not on Wednesday.
As well as talking up house building, ministers have been stressing their commitment to more infrastructure investment to help solve the UK’s productivity crisis. There will almost certainly be plenty of talk about this in the Budget – there always is.
But how should we judge the substance? In the March Budget public sector net investment was pencilled in to creep up from around 2 per cent today to 2.3 per cent in 2021-2022. Labour’s manifesto, by contrast, pledged to take it up to 3 per cent of GDP. Will the Conservatives match Labour?
The Chancellor’s fiscal rule requires him to run a structural deficit of no more than 2 per cent of GDP in 2020-21. In March he had around £26bn of headroom against this target. Public borrowing has been rather lower than expected so far this fiscal year, but the OBR has said it plans to slash its productivity forecasts on Wednesday, which will probably have the effect of wiping out some of this fiscal improvement over the medium term. The big-picture macroeconomic question for the Chancellor is whether he scraps or modifies his 2 per cent target in order to spend and borrow more on all the areas discussed above – and also on the NHS and education.
There is a strong economic argument that doing this would actually help support overall GDP growth at a time of weak private-sector demand and growing Brexit headwinds. When Labour has argued for such a relaxation of spending cuts in the past the Government has always batted it away with the claim that the bond markets would panic if they deviated from the fiscal plan. Yet it’s notable that even some professional investors in UK Government debt are now urging the Chancellor to increase borrowing to spend on infrastructure.
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