Fiscal Phil’s Band Aid Budget Before Brexit

There hasn’t been a Budget on a Monday since 1962 when Chancellor Reggie Maudling, in the wake of the ‘night of the long knives’ (the time Prime Minister Harold Macmillan sacked half his Cabinet) started the policy of reflation. That one, like today, was a ‘mini-budget’ ahead of a more comprehensive plan the following spring.

Of course Philip Hammond didn’t want a mini Budget and certainly wouldn’t describe today as so. The problem is that having shifted the Budget to October, and stopping the spectacle of effectively two Budgets a year that was the preference his predecessor, the Chancellor is now hampered by uncertainty because of Brexit, on a scale not seen in comparable history. It is why he has upped Brexit preparation funding to more than £4bn.

Despite the positive language and the Chancellor’s trademark dry quips, it is clear from today’s speech that it is truly impossible for the Treasury to make serious strategic decisions. As he put it, government is ‘preparing for every eventuality’ a surely impossible task. And even if Hammond’s threatened ‘second Budget’ proves unnecessary, this means that next year’s spring statement will end up being much more like the substantial Budget– or a ‘full fiscal event’ as the Chancellor put it - that he would like to deliver and frankly the country needs. All Budget projections have been made on the basis of what they guess to be an ‘average-type free trade deal’. Chances are they won’t be assumptions that hold water.

In this sense, the Chancellor finds himself in a comparable position to the many business leaders who will have been listening to today’s announcements. With the outcome of Brexit negotiations still so very far from clear, the March 30th deadline fast approaching, and the increasing risk of ‘no deal’ the Chancellor is not in a position yet to properly provide a fiscal policy framework for the brave new world ahead - or even to articulate adequately the worked through priorities of his Treasury. Business too has found itself increasingly unable to take medium-term decisions and many have postponed investment in people and projects until the world becomes more certain. The Budget narrative reflects this: there are several welcome initiatives and some positive rhetoric… but nothing really matters until Brexit is clear.

There was also severely limited political capital stashed away in the Gladstone box today. This is not only because of the minority status of the government, shored up by a volatile DUP. As one of the Cabinet ‘sensibles’ and unpopular with his party’s right wing Hammond needed need to tread carefully between the realism of his Treasury’s bleak forecasts and striking a positive tone about post-Brexit Britain. It meant that Hammond could not do anything radical even if he had the inclination.

While the detail is text book fiscal policy, Budgets are political theatre – a chance to wrong foot enemies and to set political agendas. So if the fiscal ambitions of today’s Budget underwhelm, the politics could hardly be more critical. At play are all sides of the Brexit argument, an opposition determined to take advantage and public differences between Numbers 10 and 11 Downing Street.

Ahead of the speech this afternoon, the Prime Minister’s office was determined to strike a more positive tone than Hammond’s realism, assuring the public that all spending commitments would be met and that indeed ‘austerity’ is coming to an end. Theresa May’s premature announcement (Britain still runs a deficit – though not for current spending - and sits on £1.8tn debt)at the Conservative Party conference that austerity is effectively over meant that politically Hammond had little choice but to respond today but he has hardly lived up to expectations. Fortunately the Office of Budget Responsibility deficit estimates have been so wrong that the Chancellor has some £13bn he hadn’t previously banked on. In fact cumulatively the OBR has been overly pessimistic by as much as £60bn during the last three financial years. A little of that was splashed out this afternoon but we will have to wait until the spring to learn what this really means.

The ‘new path for public spending’ average annual real growth of 1.2% signalled is not as generous as some had wanted but there was the promise of much more for next year’s funding review in the event of a ‘good’ deal with the EU. For now it is a Band aid Budget, holding the line until the country is a more certain place.

However, there were some interesting projects and measures signalled in this Budget.