A Budget for Caution

Body language matters in the House of Commons. After Copeland, and despite the House of Lords defeats on Brexit this week, Theresa May has rarely looked more confident and happy than she did at Prime Minister’s Questions today. Next to her, even the naturally reticent Philip Hammond looked cheerful.

In his Budget speech, he even had some good jokes and in a mark of his confidence ad-libbed to say “they don’t call it the last Labour Government for nothing”. He jested with the Prime Minister that she had pre-empted two of his three announcements about childcare, to which she replied that “today is International Women’s Day”.

Does this display of light-hearted confidence mean that the speculated early election is a live possibility, despite the firm denials yesterday from Downing Street?

If Theresa May really was planning to follow William Hague’s advice to go to the country soon, her Chancellor did not get the memo. Far from announcing new give-aways for swing voters, he raised National Insurance on the self-employed by 1p in the pound in 2018 and a further 1p in the pound in 2019. The tax free dividend allowance will be cut by 60%. “White van man” may be less than pleased, and the strongly “Mayite” Daily Mail has already expressed its displeasure this morning at higher taxes for the “middle classes”. New spending cuts were also unveiled, not the usual pattern for a pre-Election Budget. The one part of today’s measures which smacked of an appeal to the electorate related to the expansion of free and selective schools, but visible progress on this will take years.

Far from a tub-thumping pre-Election performance, this was some way in tone and style from the Budgets presented by Gordon Brown or George Osborne. Mr Hammond felt strong enough politically to announce only very limited additional sums for the NHS and for schools. Whereas his predecessors would, and did, spend extra money on the back of better growth and deficit forecasts, Mr Hammond greeted such news with a decision instead to build up a Brexit buffer, just in case the much-predicted post-referendum slowdown finally does appear this year or next. It is not necessary to agree with past Labour Shadow Chancellor Chris Leslie, who today warned of an economic “hurricane” heading towards the UK, to see the case for Mr Hammond’s battening down of the hatches.

Mr Hammond’s caution is well-known. His cunning is perhaps under-estimated. He was keen (in part to reassure his gung-ho Leave colleagues) to strike an “upbeat” tone today about the prospects for the UK ahead, and thus did not repeat his phrase from November about a “rollercoaster” ride. But he has carefully prepared his ground. Last year he announced that in the future he will switch Budgets from the spring to the autumn. That means that by this November he will have effectively had three Budgets in less than 17 months after the referendum. That means three chances to adjust to and seek to shape the overall growth picture, without any of them being labelled an “emergency” Budget.

Many of the most expensive changes in policy going forward were announced by his predecessor George Osborne. Uplifts in personal tax allowances, the rise in the threshold for the 40p tax rate, and the increase in the annual limits for ISAs were all set out by Mr Hammond’s predecessor in past Budgets or in the parts of the 2015 Conservative Manifesto which were written by him. Mrs May and Mr Hammond have to deliver and pay for these changes, but did not decide on them.

Indeed, some of these legacy announcements have created challenges for today. The contribution of Mr Osborne’s sharply rising National Living Wage to the explosion in social care costs, to which Mr Hammond had to devote an extra two billion pounds over three years today, should not be under-estimated. The task of delivering cuts in parts of the welfare budget in order to hit pre-announced spending targets remains very difficult. On the other hand, the primary challenge faced by Mr Osborne – getting first the deficit and ultimately the national debt under control – is also at the heart of the mission which Mr Hammond set for himself in this Budget, and better than expected borrowing figures today cannot conceal the fact that the UK still has one of the highest levels of debt in the G7. A surplus, once a target for 2015, is not now expected to be reached even by 2022.

One of the myths of all Budgets is that they spring, fully-formed, from the mind of the Chancellor of the day. Of course, this is not the case. They are the culmination of a great deal of options planning by Treasury officials, with intense lobbying from businesses and others. The Treasury is always looking for ways to close “loopholes” and to “protect the tax base”. Sometimes, that leads Chancellors who are not paying attention into severe political difficulty (for example, Mr Osborne’s ill-fated decision to agree to propose the “pasty tax” in 2012). On other occasions, as today, the financial logic is unavoidable. So today Mr Hammond indicated that he wants to review the business rates system, and referred to the complaints from those facing large rises, as well as the strong sense of unfairness felt by bricks and mortar retailers facing online competitors who pay far less of that tax. While he genuflected today towards those concerns, what will have most concerned him and his officials is that changes in business patterns are depriving the Treasury of what it sees as its rightful tax take.

Some parts of this Budget speech could have been lifted from those produced by Labour, Coalition and Conservative Governments alike over the last thirty years. The productivity challenge is pressing, as ever. Training and technical skills need to improve, yet again. They should be delivered under the leadership of local employers, as usual. The future lies in new technology, once more. Business leaders will hope that this time it will make a real difference, but are unlikely to hold their breath.

On the other hand, they may well welcome a delay in the digitisation of VAT for smaller businesses, extra help for the North Sea oil and gas sector, money for transport and other infrastructure, and the decision to provide £435 million of new help for business rate losers, the latter targeted on smaller enterprises and pubs.

The weekend papers were briefed that the Chancellor aimed to build up a “Brexit war chest”. The Treasury would probably prefer to call it a larger contingency fund for a three year period when there is unusual lack of visibility about the future, but the strategic choice to maximise future “fiscal flexibility” is telling.

Faced by a weak and divided Opposition, which is a staggering 31 points behind the May/Hammond team on perceived economic competence according to a poll in the Guardian this week, the Prime Minister and the Chancellor may not feel under any immediate pressure on domestic policy (the challenges of Brexit are in a very different category). But this Budget shows that, while Number 10 is keen to project confidence in the future, Number 11 wishes to be ready for more outcomes than just the rosiest. After the firm refusals by past regimes to plan for unwelcome outcomes to referendums on Scottish independence and Brexit, many may think it wise for Government at last to accept that unexpected and unwanted outcomes are not impossible ones, and provide accordingly.

Recent News