Hammond may be in a bit of a hole, but he can build his way out of it
The Chancellor doesn’t need to squander all the hard ground won on cutting the deficit
Twenty-five years ago, I was the Parliamentary Private Secretary to Norman Lamont, the Chancellor of the Exchequer. Norman was a much-maligned chancellor who suffered the disaster of Black Wednesday, but he knew how to craft skilful Budgets and paved the way for the unexpected Tory victory in the 1992 general election.
In one Budget, Norman made the bold but necessary move of halving the deeply controversial “poll tax” and hiking VAT to pay for it. However, he had a big majority behind him to support a radical change. As Philip Hammond prepares for his Budget on November 22, he has no such cushion of support. Combined with a slowing economy, intense pressure to spend more on nearly everything, and the uncertainty for businesses about Brexit, this chancellor has the most difficult task since those early 1990s.
Any significant spending cut is unlikely to get through Parliament, and any new tax increase will struggle as well – which means he will end up taking longer to eliminate Britain’s budget deficit. By being forced to spend money to ease the introduction of universal credit or give additional resources to Northern Ireland under the deal with the DUP, there is clearly a danger of being left with no room to start desirable initiatives of his own.
So, what can a Chancellor do when he has almost no room for manoeuvre but faces such incessant demands? His priority in recent months has rightly been to press his colleagues to negotiate for a transitional period as we leave the European Union, so giving reassurance to many businesses. Yet this Budget will inevitably be seen as charting the Government’s course over this Parliament, including beyond Brexit. It would therefore be wise to set out a philosophy, and overall direction, for economic policy.
The answer to all the challenges of globalisation is absolutely not to embark on the Corbyn-mcdonnell path of massive nationalisation, penalising success, and more state direction. It very much should be to ensure that this is the best place in the world to start a small business, one of the best in which to locate the HQ and operations of an international company, and a great place for bright individuals to bring their talents. The prospect of today’s Labour Party getting into power is already the biggest worry for anyone contemplating investing in the UK. The Budget ought to be the beginning of a relentless five-year effort to make that clear and pursue an attractive alternative to socialism.
Next could come recognition that stability in most financial matters is better than constant tinkering and changes of approach. That means building on the achievements of George Osborne. Putting off the year when the Budget is finally balanced is one thing, but increasing the UK’S deficit from one year to the next would be a mistake after the huge effort of recent years to bring it down. And the drive for a Northern Powerhouse, which has lost momentum, should be fully revived.
Then, Mr Hammond could present a series of clear themes, and the first of those should be housing.
A serious increase in house building is crucial to help the economy and address the problems of younger people. Ministers have got the point on this and have been announcing new garden villages, more council housing and increased funds for the help-to-buy scheme. These need to be brought together with a streamlining of planning decisions, major changes in regulations to permit smaller apartments, more rapid sales of government land, and any other measure that will liberate privatesector building.
Quicker decisions and a cross-party plan would achieve more than billions in extra taxpayers’ money.
The second theme should be infrastructure. The Chancellor has already made many announcements on road and rail improvements, but few people really absorbed his pledge last year to raise, permanently, the share of our national income spent on transport and telecoms to 1.2 per cent, which will involve billions of pounds of extra spending. This time, he should be able to point to the extra projects this will permit. He could consider new infrastructure bonds to raise money for specific schemes and replace the lost support of the European Investment Bank. He should also end the interminable Heathrow airport debate – if it’s so hard, expand Gatwick, but let’s get on with it.
His third theme should be fairness for young people. If democracy is working, the Conservatives have to respond to the huge discontent that became clear at the general election. Hammond has asked for ideas – and some of us have advocated a sharply lower rate of income and capital gains tax for everyone under the age of 30, paid for by a small increase for the rest of us. Others say that would penalise and antagonise older people and would be politically impossible. But tilting the tax or national insurance system one way or another towards helping the finances of younger workers, and in particular young entrepreneurs, should be a priority.
If there is any leeway at all in the public finances – government borrowing has come in lower than forecast in recent months – I hope it is devoted to these three vital issues for the future. However, there is a fourth theme which costs nothing for now but is one the world needs to hear about Britain. This is that, whatever happens in the Brexit talks, deal or no deal, the Government will do whatever it takes to ensure we remain at the centre of key new industries. The UK is now a global centre for design skills, and of fintech – technological innovation in the financial sector. We should be clear that either there will be an agreement that will allow these industries to prosper through trade with the EU, or we will give them extra advantages to be located here.
A Budget that contains these elements, and avoids becoming bogged down in other issues, would have a chance of presenting a UK based on enterprise and preparing for the future, while also being feasible for a minority government. The detail will be full of pitfalls and the pressure to throw money at every cause will be intense, but we have a highly capable Chancellor – let’s hope he proves it.