Allister Heath
Hammond needs to find his inner wheeler dealer
It will be hard for some to believe but Philip Hammond was once a colourful, buccaneering entrepreneur, the opposite of the grey-suited bean-counter he now purports to be. As a schoolboy in Essex, the man who today serves as our Chancellor of the Exchequer made good money renting out church halls for discos, before graduating to trading cars made at the local Ford factory.
He had a knack for spotting a profit opportunity and struck his first real deal aged just 24, when he bought out his employers’ medical products division for just £1. Over the years, Hammond had his fair share of failures as well as successes, like all entrepreneurs, but ended up making millions from a range of property and construction, manufacturing and energy businesses.
People don’t really change, which is why I’m hopeful that Hammond may rediscover his risk-taking instincts and ditch the ultra-cautious, lugubrious and bizarrely pessimistic persona he has acquired since entering politics. The world has shifted dramatically in the past five months, and Britain desperately needs a dose of the old, glass half-full Hammond.
Governments must deal with reality as it is, not as they hoped it would be, and this applies even more to Trump’s triumph – which Downing Street neither predicted nor wanted – than it does to Brexit. Nobody knows, at this stage, whether Trump’s presidency will implode in an orgy of demagoguery, protectionism and corruption, or whether it will confound its critics by governing in a neo-Reaganite manner.
Realpolitik must thus be the order of the day. Given the inflammatory elements of Trump’s campaign, the British Government needs to remain vigilant; but it should also seek to make the most of the new world order and the imminent pro-Brexit and pro-growth shift in Washington. This is where Hammond comes in. Brexit alone would have required a radical response from the Chancellor; Brexit, Trump and the growing likelihood that strains in the eurozone will eventually reach breaking point make this an urgent necessity.
Hammond’s first Autumn Statement next week is the first real opportunity for the May Government to regain the initiative and to show that it has an exciting, optimistic plan for our post-Brexit prosperity. Hammond cannot afford to be hemmed in by the pessimistic consensus – the same duff predictions that claimed the Brexit vote would trigger an immediate collapse in growth and jobs. He needs to break free from the constraints of the Treasury’s models.
The Chancellor should start off by pointing out – diplomatically, of course – that the rise in the deficit is largely the doing of his predecessor: the previous predictions never had any hope of coming true, Brexit or no Brexit. He must then retain an iron grip on almost all areas of current spending, while announcing his own deliberate but carefully controlled loosening in fiscal policy.
The first big change is that the Chancellor needs to be much more radical on tax, and unveil at least one flagship measure to improve incentives to work and invest. He should commission a major review of the tax system, with the aim of drastically simplifying and flattening it.
Trump changes everything here: America is about to embark on the greatest supply-side tax cuts on business and workers since Ronald Reagan. The Republicans want to slash the top rate to 33 per cent, increase the personal allowance and abolish the estate tax, among other things. Capital gains tax rates would be no more than 20 per cent. Corporation tax would be slashed to between 15 per cent (under Trump’s plan) and 20 per cent (the House’s alternative). A special 10 per cent tax rate could be introduced for US multinationals repatriating the money they hold overseas, sucking trillions of dollars back into the US economy.
Britain cannot afford to stand still. Combined with the possibility of a major pro-growth shift in the way Wall Street is regulated, and the big London-based investment banks’ fears that they will be frozen out of European markets after Brexit, now is also the time for Hammond to ditch the banking levy supertax.
Second, trade. The UK needs to take every opportunity to defend the World Trade Organisation against the new administration’s troubling protectionist instincts, which are likely to be focused on emerging markets. But in other respects the dreams of many Brexiteers have suddenly come true: there is now a real chance of a bilateral trade deal with the US, as soon as we leave the customs union.
Hammond should ignore the clueless naysayers who claim that we should reject or delay this historic opportunity to ensure we don’t alienate the EU; talks with Washington should begin in parallel with those with Europe. A US-UK free trade deal would transform our negotiating position with the EU and would be game-changing in every possible way. Hammond should at the very least hint that he is excited by this next week.
Next, defence. Trump’s lukewarm approach to Nato means that Britain’s strong military will become a major bargaining chip in our Brexit talks, especially when it comes to convincing eastern Europe countries. Defence spending as a share of GDP fell to 1.9 per cent in 2015-16; Hammond should pledge to increase it to 2.2 per cent by the end of the decade.
The Chancellor must also move fast on energy, infrastructure and housing. He needs to intensify and accelerate the development of shale, and speed up road-building projects. As for housing, apart from releasing more land, tearing down barriers to entry for new housebuilders and applying some of the lessons he learnt in his construction business, Hammond should slash stamp duty across the board. The fiscal impact would be limited – it is one of those tax cuts that could pay for itself, directly as well as indirectly. The number of housing transactions would rocket, more people would be able to upgrade or downsize their homes and lots of other spending and tax revenues would be generated.
In his original, swashbuckling incarnation, Hammond loved to roll the dice, to take a calculated risk. Electorates here and in America are certainly in that sort of mood. The Chancellor needs to show them what he is really made of, and deliver an Autumn Statement fit for the times.