Fiscal Phil has had to swallow No 10’s medicine

The Chancellor gave a bold Budget. The question is whether he can stay onmessage with conviction

As he rose from behind the despatch box in the Commons yesterday, Philip Hammond knew he was under pressure. First, he could not afford to repeat the errors of his first Budget, when he proposed a tax hike on the selfemployed, only to climb down days later. And secondly, at a time when hard-pressed families are crying out for meaningful change, he had to show he was capable of being bold.

This Budget was not truly radical, but Hammond passed the test. He avoided making unforced errors. And, for the first time since his appointment as Chancellor, he showed that he understood the twin challenges facing the Government: the need to address Britain’s productivity crisis while supporting ordinary, working families who are “just about managing”.

The Chancellor managed to do this even as he announced bad economic forecasts. The Office for Budget Responsibility revised down its growth forecasts – so that in none of the next five years will growth exceed 1.6 per cent – and predicts lower productivity growth than it had anticipated in March. This is grim news and – if the forecasts turn out to be true – it is difficult to see average wages increasing by very much any time soon.

Hammond passed his test – but he did so only by capitulating in several important ways.

In the Budget in March, he insisted that any leeway he had with the public finances should not be spent, but set aside as a “war chest” in case Brexit caused a severe economic shock. This time, there is still a war chest, but he gladly used up his leeway, spending more public money and reducing taxes.

Previously, he was adamant that any additional public spending must be financed by new “revenue raisers”. This was how he got into trouble in his last Budget, when he proposed the increase in National Insurance contributions for the self-employed. This time, with zero appetite for risk, he proposed no dangerous revenue raisers.

Inside government in recent weeks, the Chancellor has argued against spending significant sums on house building, and fought against the proposal to increase research and development spending to the OECD average (2.4 per cent of GDP) within 10 years. But having been instructed to proceed with both policies by the Prime Minister, he was proud to announce them in his Budget statement.

The Red Book, the Treasury document that is published as the Chancellor makes his statement in the Commons, makes the U-turn plain. Accounting and classification changes from the Office for National Statistics (ONS) – most notably the removal of housing association liabilities from the Treasury’s balance sheet – have given Hammond more than £5 billion a year to use as he sees fit.

“Fiscal Phil” of the March Budget would have pocketed the proceeds from this accounting change and insisted they go towards deficit reduction. But, concerned that his job was on the line, “Fiscal Phil” gave way to “Headlines Hammond”, and the Chancellor decided to spend the money. The Red Book shows that policy decisions in this Budget will cost almost an extra £10 billion in 2019/20 and cause borrowing to increase by a further £9.2 billion in that year.

I have no issue with any of these changes in position. When I worked in government, I argued in favour of tax changes that benefited working families and the young. I supported a new fiscal policy that would allow government to borrow more to fund infrastructure projects that will deliver a return on investment through improved productivity. And I was a proponent of the industrial strategy that the Chancellor often sought to stymie but now seems, in this Budget, to endorse.

The industrial strategy, which is due to be launched by Greg Clark on Monday and which was backed in this Budget, will be vital if the Government wants to rebalance the economy so that it is less reliant on London and on financial services. It will also be vital if we are going to improve British productivity, which has stagnated since the financial crash a decade ago. If productivity growth had followed its pre-crash trend, says the ONS, our productivity would be more than 20 per cent higher than it is today: British firms would be making bigger profits, providing more investment and paying higher wages.

If the Chancellor is now an enthusiast for the industrial strategy, tax policies that benefit ordinary, working families and young people, and perhaps even a different approach to fiscal policy, that is welcome. He even talked positively in his Budget statement about government intervention – a banned word among some Tories – in the housing market. If he truly is reconciled to increasing investment in infrastructure, a strategic role for the state in the economy and the need for government to intervene where necessary, this Budget may even be a turning point.

Let us hope it really is a Damascene conversion, and not a cynical act of self-preservation.