The new chancellor
A desire for reform is needed at No 11 Matthew Lynn
A£16m fund for 5G mobile technology. A one-year rates discount for pubs with a value of more than a £100,000. Putting VAT on roaming mobile charges outside the EU, and a reduction in the tax-free allowance on dividends. Looking back, Philip Hammond hardly set a new benchmark for reforming passion with his first Budget as Chancellor in 2017. He started with a few tweaks so minor that even the Treasury officials who suggested them probably can’t remember them any more. And he carried on in the same dismal vein for the next couple of years.
There is some stiff competition for the prize of the most irrelevant post-war Tory Chancellor, but Hammond is certainly right up there among the top three.
This week, along with a new prime minister, we will learn the name of his successor at No 11. There are plenty of names in the frame. In truth, however, the person doesn’t matter so much as the policies. Although they will be greeted with plenty of doom and gloom, he, or preferably she, has a great hand to play.
There is money to free up, and a huge reform agenda waiting to be seized. If they want to, they could carve themselves a place in the history books.
Assuming Boris Johnson becomes prime minister later this week, he will have no more urgent task than appointing a new chancellor. There are plenty of names in the frame. Jeremy Hunt enhanced his reputation with an impressive leadership campaign. Sajid Javid has a career in the City behind him. Dominic Raab has the reforming credentials. Liz Truss has experience of the Treasury and Kit Malthouse worked effectively with Johnson as London mayor.
They could all prove to be excellent chancellors. And yet, it is not really the person that will make a difference. It will be the desire for reform.
As they take office, the briefings
from Treasury officials and the mainstream think tanks will no doubt be full of dire warnings about the state of the economy.
Crashing out of the EU will bring on a severe recession. A £30bn black hole is about to be blown in the public finances. The global economy is turning down, taking Britain with it. The chancellor should batten down the hatches and try to weather the storm. It is mostly nonsense.
As it happens, the new person at No11 has a perfect opportunity for real change.
Sure, there will be some stress around our departure from the EU especially if there is no deal. But it is wildly exaggerated.
Even the central scenario from the Office of Budget Responsibility last week only estimated a two per cent drop in GDP, and that was before any policy response is taken into account. For context, that would be the ninth post-war recession for the British economy, and it would rank at about halfway up the scale for severity (and wouldn’t be as bad as the last three). It is hardly the end of the world.
Against that, there are two positive factors. The public finances are in decent shape, so there is money to play with. And Johnson is not a details person (to put it mildly) so the Chancellor can shape their own agenda. So what should they concentrate on? There are four big priorities.
First, prepare a stimulus package. There is no question that the UK economy is going to need a boost by the autumn. The eurozone is already slowing down, and so is the United States, and both the ECB and the Federal Reserve are planning to cut rates or print more money to counter that.
Add in the disruption of our departure from the EU and the UK needs to move fast to prop up growth. On the upside, we are one of the few major economies that can use fiscal as well as monetary policy (the eurozone can’t, because it breaks the rules of the
‘Hammond seemed content to simply move the paper clips from one side of his desk to the other’
club, and Donald Trump has already spent every dollar he can borrow).
The budget deficit is under control, which, in a world where France just overtook Italy as the continent’s biggest debtor, means the balance sheet is in comparatively good shape. The trick will be to craft a package that lifts demand and also makes us more competitive.
What should that look like? A big increase in infrastructure spending, slightly higher public sector wages, cuts to personal taxes, and a cut in corporation tax so we are the most business-friendly developed country in the world would all be good places to start.
Next, map out a vision for the British economy in the 2020s. We know what that should look like. Technology and services based, with high skills and high productivity, globally connected, growing fast, and with wealth distributed fairly between generations and regions. The issue is how you get there. The answer. Craft regulations that allow investors into the UK as well as our own entrepreneurs to develop new technologies; reform immigration so we bring in the people with higher skills but also wean industry off its addiction to cheap migrant labour (and accept that some of them will suffer in the process); reduce tariffs to boost living standards; and upgrade our infrastructure so that business can expand where it wants to. At the very least, that would be a start.
Thirdly, simplify the tax system. It is three decades since we had a chancellor who understood why we should have as few taxes as possible. Ever since then, successive Budgets have piled fiddly tweaks on top of each other until the whole system is close to collapsing under its own deranged complexity.
The tax code is now up to eleven million words. It is cluttered with minor reliefs of mind-boggling irrelevance (do we really still need the “animation tax relief ”, or the landfill tax “exemption for dredging waste”?). We could halve the code, collect just as much money less painfully, and free up everyone’s time to do something more useful instead.
Finally, appoint a new governor of the Bank of England who is willing to seize the opportunities that leaving the EU present. Mark Carney has been perfectly competent, but he has been paralysed by our departure from the EU. The Treasury and the Bank need to be working together to reshape the British economy.
The City needs to be allowed to pivot towards Asia, the Middle East and the emerging markets, as well as developing its global lead in fintech. The Bank needs to work with the chancellor on a stimulus package as we leave, including some form of helicopter money if necessary.
That will take boldness and imagination. It is good news that the economist Gerard Lyons, an ally of Johnson, has been interviewed. He is positive about the UK’S future outside the EU.
There is huge scope for a reforming Conservative chancellor. Neither George Osborne or Philip Hammond showed any interest in that. Osborne concentrated on restoring balance to the public finances and winning the next election while Hammond seemed content to simply move the paper clips from one side of his desk to the other. His successor should seize the opportunity for a bold first Budget – or at least something that beats VAT on roaming charges for imagination.