Back to the fu­ture for Chan­cel­lor Ham­mond

Fa­ther of the House gives ad­vice to the Chan­cel­lor as he steers a course away from aus­ter­ity and through Brexit. By Anna Isaac

The Sunday Telegraph - Money & Business - - Front page -

When Ken Clarke MP pre­pared to give his first Bud­get as chan­cel­lor, on Nov 30 1993, he was a lit­tle ap­pre­hen­sive about the re­ac­tion. Clarke had his rea­sons. He was about to in­tro­duce some of the largest tax hikes and spend­ing cuts seen since the af­ter­math of the Sec­ond World War.

“Short-term pop­u­lar­ity struck me as ir­rel­e­vant. I went quite far, be­cause po­lit­i­cally I fol­lowed the or­tho­dox be­lief that you do the dif­fi­cult thing as quickly as you can.”

How­ever, it did not play out as ex­pected. The UK’S long­est serv­ing mem­ber of par­lia­ment, Fa­ther of the House of Com­mons, was in for a shock.

“I tried to en­joy Bud­get day. I de­liv­ered it in as flam­boy­ant a way as I could and I had my large glass of whisky [be­fore­hand] and all of that, and [then] it went very well.

“It was re­ceived so well in the House of Com­mons that I told my­self as I sat there ‘per­haps they haven’t lis­tened to what I’ve just been say­ing’. Be­cause I had im­posed some very tough spend­ing to­tals on most de­part­ments,” Clarke says.

They were in­deed harsh. De­fence had £250m shaved off its bud­get, and costs were cut in so­cial hous­ing and trans­port. Clarke had also an­nounced that he was go­ing to raise the state re­tire­ment age for both gen­ders to 65. A suite of tax “loop­holes” were closed.

New taxes were in­vented in­clud­ing air pas­sen­ger duty and in­sur­ance pre­mi­ums. Clarke played a clas­sic chan­cel­lor’s trick, what he terms a “sur­rep­ti­tious tax take”, of freez­ing the per­sonal al­lowance for in­come tax.

UK econ­o­mists are again turn­ing to this Bud­get for les­sons, and for one sim­ple rea­son. Theresa May, the Prime Min­is­ter, has an­nounced the end of aus­ter­ity, and that means find­ing an ex­tra £20bn to pay for new NHS spend­ing com­mit­ments.

Com­bined, this “more money, no more cuts” prom­ise leaves Philip Ham­mond, the Chan­cel­lor, in a tight spot. Bor­row­ing presents other po­lit­i­cal dif­fi­cul­ties.

The In­sti­tute for Fis­cal Stud­ies (IFS), a lead­ing pub­lic spend­ing think tank, be­lieves that presents just one al­ter­na­tive: hike taxes.

Such a move would take UK tax re­ceipts to 35pc of na­tional in­come, the great­est share since the late For­ties. It would be the big­gest shift since 1993.

The state of the econ­omy now, com­pared to a quar­ter of a cen­tury ear­lier, is, un­sur­pris­ingly, dif­fer­ent.

In 1993, the UK was emerg­ing from re­ces­sion. Growth hit 0.2pc in the first three months of the year. The two years prior had brought one of the long­est, if not the deep­est, re­ces­sions since the Thir­ties. Amid the down­turn, Black Wed­nes­day, on Sept 16 1992, when the UK Gov­ern­ment with­drew the pound from the Euro­pean Ex­change Rate mech­a­nism, cost the Trea­sury a re­ported £3.3bn. The po­lit­i­cal ca­reer of Clarke’s pre­de­ces­sor as chan­cel­lor, Nor­man La­mont, never re­cov­ered. The gov­ern­ment’s spend­ing cup­board was bare.

As Clarke said in his maiden Bud­get there was an “over­rid­ing need” to place pub­lic fi­nances on a “sound foot­ing”.

In the past decade, the gap be­tween what comes into the ex­che­quer and what is spent, the deficit, has been nar­row­ing. Thanks to the George Os­borne and Ru­pert Har­ri­son-led aus­ter­ity pro­gramme it is at its low­est level since 2001 at close to 2pc of GDP.

“If you com­pare it to the US and Ja­pan, where bud­get deficits are 4-6pc of GDP, the UK, with the 2pc [deficit], has im­proved a lot. But there’s still some way to go un­til you’re best in class,” ex­plains Chris­tian Schulz of Cit­i­group.

While the UK has not just found its way out of re­ces­sion, but has had sev­eral years of growth, the re­cov­ery has not been ro­bust. Wage and pro­duc­tiv­ity growth has been slug­gish for sev­eral years, cur­tail­ing eco­nomic growth and, cru­cially, mak­ing it harder to im­prove na­tional debt as a share of GDP as a re­sult.

Whereas pub­lic debt was a mere cou­ple of hun­dred bil­lion in 1993 it is now, fol­low­ing its bal­loon­ing from 2007 on­wards, stand­ing at close to £1.8 tril­lion.

“We do have to be mind­ful of the fact that debt-to-gdp is still very high. It is al­most dou­ble what it was be­fore the 2009 fi­nan­cial cri­sis. Whit­tling away at that debt pile is some­thing that the Chan­cel­lor will have to bear in mind,” says Dean Turner of UBS Wealth Man­age­ment.

Ham­mond, al­ready caught be­tween na­tional aus­ter­ity fa­tigue, grand prom­ises from Theresa May and a party that has a hard­core group of tax-slash­ing sup­port­ers, faces an ad­di­tional chal­lenge: Brexit. Ac­cord­ing to Schulz, above all else Ham­mond must face up to the im­me­di­ate pol­i­tics and the “risk that his bud­get could get voted down be­cause of Brexit and a small ma­jor­ity.”

In many ways, Turner and other City econ­o­mists think that Brexit will cur­tail most of the dra­matic ac­tions Ham­mond can take. For Turner, un­der­stand­ing Ham­mond’s room for ma­noeu­vre is down to a closer look at May’s aus­ter­ity word­ing. He be­lieves that it was a prom­ise pred­i­cated on a suc­cess­ful Brexit ne­go­ti­a­tion in the next few months.

“[As a re­sult] The Chan­cel­lor will need to keep his pow­der dry just in case the tran­si­tion ar­range­ment doesn’t tran­spire,” Turner says.

Brexit or no Brexit, there is still a black hole in the Gov­ern­ment fi­nances un­less other de­part­ments see their bud­gets used to find the money for NHS spend­ing, and if Ham­mond is to bal­ance the books by the mid-2020s. Meet­ing what the IFS terms the “min­i­mal def­i­ni­tion” of end­ing aus­ter­ity could be achieved by adding 1pc to VAT, in­come tax rates and na­tional in­sur­ance con­tri­bu­tions. The in­come tax changes would raise around £6bn each year, NICS £8.2bn and VAT around £6.1bn. Com­bined, they plug the £20bn short­fall. Need­less to say this would be po­lit­i­cally ex­plo­sive.

“In 1993 it was a dif­fer­ent po­lit­i­cal world to 2018. No­body thought bud­gets were nec­es­sar­ily go­ing to be pop­u­lar,” says Clarke.

How­ever he does it on Oct 29, Ham­mond, whom Clarke terms a clas­sic “fi­nance di­rec­tor of a medium firm” has no choice: he sim­ply “has got to raise some rev­enue”.

Such a slim Tory ma­jor­ity how­ever, makes a less rad­i­cal com­bi­na­tion of a bor­row­ing fudge and small tax rises more likely.

‘I tried to en­joy Bud­get day. I de­liv­ered it in as flam­boy­ant a way as I could and I had my glass of whisky’

Ken Clarke, above, said that when he was chan­cel­lor it was a ‘dif­fer­ent world’; but Philip Ham­mond, left, has some dif­fi­cult choices

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