Philip Hammond signals easing of austerity

  • March 13, 2018
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UK chancellor Philip Hammond has signalled an easing of austerity after a decade of severe public spending restraint, in a Spring Statement that will fuel demands from Tory MPs for more cash for hospitals, schools and defence.

Mr Hammond described himself as “positively Tigger-like” as he presented upgraded forecasts for the economy and public finances. He claimed that the country had reached “a turning point”, with debt forecast to start falling next year.

But any Tory hopes of a big increase in public spending are likely to be dashed, as Mr Hammond set out forecasts that would leave Britain near the bottom of the G7 growth league. He remains determined to drive down debt peaking at 85.6 per cent of GDP.

The chancellor’s tone was markedly different from his normally austere rhetoric, making light of his “Eeyorish” reputation to proclaim that he was building an economy “where prosperity and opportunity are in reach of all”.

But the chancellor’s innate caution was reflected when he noted that this only amounted to “light at the end of the tunnel”, a signal to cabinet ministers to temper their demands for extra spending ahead of his main Autumn Budget.

Mr Hammond told MPs in a brief statement on Tuesday lunchtime that he would take “a balanced approach”, using any fiscal leeway to bear down on debt and keep taxes low as well as leaving modest room for extra public spending.

He said he was on track to meet his target for borrowing no more than 2 per cent of national income in 2020-21 with £15.4bn of headroom, giving him some room for higher spending on priority public services in the autumn.

But the real battles over public spending will come in 2019, as Mr Hammond announced a multi-year Whitehall spending review that will set the political battlelines for an election scheduled for 2022.

Some ministers — and former Treasury mandarins — have suggested that Mr Hammond might have to consider higher taxes, or an earmarked “NHS tax”, to provide the funds needed to meet growing demands for health and social care.

Mr Hammond presented forecasts by the Office for Budget Responsibility, which upgraded its growth projection in 2018 from 1.4 per cent to 1.5 per cent and lowered its forecast for borrowing in 2017-18 to £45.2bn from £49.9bn predicted in November.

But the new forecasts for growth and borrowing were not as bullish as many economists had predicted ahead of the statement and they limit Mr Hammond’s capacity to open the spending taps later this year.

Strong figures for tax receipts and productivity growth since November had led many commentators to predict an improvement in borrowing of up to £10bn this year.

Mr Hammond put a brave face on the figures. “Forecasts are there to be beaten,” he said. “As a nation we did it in 2017.”

The OBR’s new forecast for growth this year — of 1.5 per cent — is slightly below the average of recent independent forecasts and leaves the UK growing less quickly than most other G7 economies, with the exceptions of Italy and Japan.

The OBR then predicts the UK economy will grow 1.3 per cent in 2019, 1.3 per cent in 2020, 1.4 per cent in 2021 and 1.5 per cent in 2022. These forecasts are the same as those published in November up to 2020 but a touch lower in the final two years of the forecast horizon.

Public borrowing is forecast to fall from £45.2bn this year to £28.7bn in 2020-21 and £21.4bn by 2022-23.

The OBR also published a profile of spending on the UK’s £37bn “Brexit bill”, with the final payments not falling due in 2064 as young officials in the EU bureaucracy draw down their pensions.

Mr Hammond remained true to his word not to announce any new tax or spending commitments in his first, pared-back Spring Statement.

But he announced a raft of consultations on tax issues, including one to explore how online platforms such as Airbnb can “help their users to pay the right amount of tax”.

The Treasury also published suggestions for how the UK government could tax large digital businesses, along with proposals to ensure that online companies pay value added tax owed to ensure this flows to the exchequer. The chancellor launched a call for evidence on how to tax single-use plastics.


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