Autumn Statement 2016: Political view

Had it been Gordon Brown or George Osborne at the Commons despatch box, they would have been determined to make a political splash. Temperament and circumstance took Philip Hammond to a different destination. Call it flexible austerity; or perhaps more simply, pragmatism. Yes, the chancellor told the nation, he would be a prudent guardian of the nation’s finances. But no, austerity would not become a rigid straightjacket amid the turbulence of Britain’s departure from the European Union.

 

As befits a politician who takes no offence at being likened to an old-fashioned bank manager, Hammond’s Autumn Statement was straightforward and sober – shorn of the headline-grabbing tricks favoured by his predecessors, though not without the odd flash of dry humour. He was as adept at pulling rabbits out of hats, the chancellor confided, as was the foreign secretary at picking up loose balls from the back of the scrum: a tart reference to Boris Johnson’s failed attempt to win the Tory leadership.

 

That said, there was one small rabbit: the long overdue reform of the tax and spending process. The new format is of a short statement in the spring, followed by a full scale autumn Budget five months before the start of the following financial year. It makes eminent economic sense, as well as – given the likely timing of the start of article 50 Brexit negotiations – good political sense.

 

Circumstance imposed itself in the form of the consequences of, and uncertainties surrounding, EU withdrawal. As a pivotal player in the cabinet committee charged to agreeing Britain’s opening bid in negotiations with the EU27, Hammond knows there may be economic shocks to come. The chancellor’s starting point is that the government should do all it can to stay in the single market. The prime minister is more worried about immigration and managing a Tory party that seems to be looking for a cleaner break with Brussels.

 

For all that, the statement revealed a marked political tilt. Hammond looks ready to shift some of the pain of fiscal restraint from spending cuts to tax increases. He was also prepared to add to already rising borrowing numbers to fund a £23bn ‘productivity fund’. Osborne always looked a prisoner of the Treasury’s fiscal fundamentalists. Now they have been quietly sidelined. In other circumstances, Her Majesty’s loyal opposition would have made political hay from such a startling about-turn. But Labour is led by Jeremy Corbyn and has effectively ceded the political centre ground.

 

David Cameron’s government put itself on the side of global business, forever rolling out the Downing Street red carpet for the titans of the big tech companies. Theresa May is pitching for the so-called ‘Jams’ – working families just about managing to keep their heads above water in tough economic times – and for small and medium-sized manufacturers in the Midlands.

 

The constraints, however, are obvious. The cost of Brexit in terms of slower growth and bigger deficits was set out by the Office for Budget Responsibility (OBR). Sterling’s sharp depreciation will cut household incomes, while business will likely damp investment until Britain’s future relationship with the EU is settled. The OBR’s best guess is that the economy will be 2.4% smaller in 2020 than if the vote had gone the other way.

 

The impact on the Treasury’s fiscal targets – an additional £120bn of borrowing during the next five years with public debt hitting a peak of 90% of national income in the next financial year – leaves the government with precious little room for manoeuvre, even as Hammond’s new fiscal framework builds in some headroom if the economy slows further.

 

It was no secret that the statement was the product of a lengthy and robust series of exchanges between the chancellor and the First Lord of the Treasury. May’s preferences were revealed in the micro-measures to freeze fuel duty, provide extra funding for affordable homes, scrap the fees charged to tenants by letting agents, and dilute somewhat the planned cuts to in-work benefits.

 

The substance, though, belonged to Hammond. It is not often you hear a chancellor point out that Britain’s productivity is running well below not just that of Germany and the US but also France and Italy. Hence the £23bn fund for road and rail schemes, housing, 5G broadband, and research and development projects. The chancellor, a successful businessman before turning to politics, has not turned his back on the market. He does think that government has a role in pushing things along.

 

So the statement fitted the occasion. If the OBR’s growth forecasts are met – a sharpish downturn in 2017 followed by a gradual pick-up during 2018 and 2019 – then the deficits may not look so worrying. But, speaking candidly, Hammond would probably admit this was a holding operation.

 

The economy has held up unexpectedly well in the immediate aftermath of the referendum. Brexit, though, is a process rather than event. The chancellor’s efforts to bring cabinet discussions down to earth – to recognise that a cliff-edge departure from the single currency and the customs union would deliver a much bigger shock to the economy – will count for a lot more than his first and last Autumn Statement.

 

As things stand, debate in the cabinet committee is finely balanced and May is keeping her counsel. But the biggest economic decision her government will have to take before the 2020 general election will be contained in the letter she writes to Donald Tusk, the president of the EU Council, some time before the end of March 2017. The hope must be that it is drafted by Hammond.