Hammond must not add to uncertainty
Philip Hammond will deliver his last pre-brexit Budget against the backdrop of a UK economy showing considerable resilience. That’s what the economic facts on the ground demonstrate, despite the narrative of negativity. Across the economy, pay has been rising faster than inflation for the past five months, with average real wage growth now at 3.1pc – a 10-year high. Companies are hiring at record levels and unemployment is at a four-decade low, with unskilled workers now finally able to exert some bargaining leverage over employers.
Inflation eased in September, the consumer price index growing 2.4pc during the year to last month, despite a 50pc oil price surge over the same period. Lower inflationary pressure should discourage the Bank of England from further interest rate rises, the last increase having come in August, when the “base rate” went up from 0.5pc to 0.75pc.
It’s often said that “since the June 2016 Brexit vote, the British economy has been at the bottom of the G7 growth league”. I heard the director of one of our leading economic think tanks use exactly that phrase on the radio only last week. Yet the UK grew by 1.8pc in 2016 – faster than the US, France and Canada, among others. Last year, our growth was 1.7pc – still better than Japan and Italy, both in the G7 the last time I checked.
The UK certainly suffered a slow growth start to 2018, hit by unusually cold weather. But it has since expanded at a steady, if unspectacular pace. Growth hit 0.7pc during the three months from June to August – a two-year high. The International Monetary Fund predicts a 1.4pc expansion for 2018 as a whole – again, ahead of Japan and Italy – but that’s probably too pessimistic.
Certainly, the UK’S composite PMI index – an influential economywide survey measure – stayed above 54 in September, with readings over 50 indicating growth. That’s one reason I’d venture we’re looking at UK growth closer to 1.7 or even 1.8pc in 2018 – placing Britain mid-table in the G7 growth league.
It’s not impossible, in fact, that the UK could outgrow Germany and France this year. The Bundesbank just warned that Germany’s third quarter growth figures, due to be published in mid-november, will be sluggish – given the recent significant drop in industrial output in the eurozone’s biggest economy. And last week the Banque de France said it expected just a 0.5pc GDP expansion during the third quarter – that is, July to September. The highly-respected National Institute for Economic and Social Research now predicts 0.7pc UK growth during the same period.
None of this is to say that the British economy isn’t fragile. Business investment is most definitely now being impacted by Brexit-related uncertainties – which helps explain why UK growth remains below its pre-referendum trend.
Having said that, growth has been slowing around the world of late – from the eurozone to Japan and even China. Rising interest rates, trade disputes, spiralling debt burdens and the escalating cost of crude have combined to generate significant jitters across global financial markets.
With the exception of the US – pumped up by Trump’s deep tax cuts, which could yet prove rash – stuttering growth is a global phenomenon. And even America hasn’t escaped market heebie-jeebies. Earlier this month, the Dow Jones Industrial average of leading US stocks was almost 10pc up on the start of the year. All those gains are now gone.
It’s also worth saying that the growth performance of the eurozone, with which the UK is often compared, is still artificially inflated by the European Central Bank’s “extraordinary monetary measures”. The ECB continues to pump out tens of billions of euros of “quantitative easing” each month. That’s due to end soon – at least that’s what ECB Supremo Mario Draghi said at his press conference last Thursday, not least for German consumption.
This column has argued for months that Italy’s slow-motion banking crisis, and an increasingly testy budget row between Rome and Brussels, means ECB QE will continue into 2019 and beyond. We’ll see. What’s clear is that directly comparing UK and eurozone growth is bogus. Britain, having stopped QE years ago and in the midst of its own rate-rising cycle, has taken some tough steps on the road back to economic normality. The eurozone, in contrast, still sucking on the QE teat and with negative nominal interest rates, remains in economic la-la land. Yet, UK growth could outpace France and Germany during 2018.
Ahead of this Budget, of course, Hammond can point to improving public finances. In September, the gap between tax revenues and public spending narrowed to £4.1bn, compared with £5bn in the same month a year ago. Since April, the Government has borrowed £19.9bn, down sharply from £30.6bn during the same period in 2017. That why Labour is now calling on the Chancellor to “stump up the cash” for more spending.
Some ideas being floated ahead of this Budget are interesting. A flexible Vat system would certainly be preferable to simply lowering the threshold – which would hammer small firms. A sliding scale, bringing hard-working sole traders into the tax system gradually, would remove the disincentive for them to expand. Such measures, prevented by EU rules, should be considered after Brexit. Proposals encouraging highly-regulated pension funds to invest in infrastructure projects also sound sensible.
Theresa May, desperate for applause, has already pledged an additional £20bn for the NHS – which Hammond should deliver, taking advantage of the recent uptick in revenues. Beyond that, the national debt is high and rising. The Government is now spending more on debt interest than on schools – and debt service costs will clearly rise. Instead of spending extravagantly, Hammond should build fiscal strength. Markets are febrile and the global economy is entering a rough patch. This isn’t the time to rack up ever more debt.
The UK already faces considerable uncertainty, not least due to Brexit. As such, Hammond should keep tinkering to a minimum, adding as little extra uncertainty as possible.
Above all, the Chancellor should tomorrow attempt to put right the biggest failure of his career, doing everything he can to prepare Britain for the “no-deal” Brexit which some of us have long predicted, and now looks increasingly likely.
‘The UK suffered a slow growth start to 2018, hit by unusually cold weather. But since then it has expanded at a steady rate.’