This wasn’t a Brexit Budget, it was a Brexit uncertainty Budget. Almost all the dire economic and fiscal news that was revealed today was the result, not of Brexit itself, but of the referendum decision and the pending Article 50 negotiation. This could be just the start.
The Office for Budget Responsibility’s assumptions about 2017 lay at the heart of the new forecasts. Along with every other serious commentator the OBR thinks that currency devaluation and business uncertainty will result next year in high inflation and low investment.
And the office’s numbers show that the impact will be felt by us all, with growth in real household incomes grinding to a halt. Low earners could be hardest hit, because the OBR expects a lower National Living Wage in each year to 2020 despite the extra inflation.
These forecasts are bad, but they basically assume that Brexit is a one-year wonder. All the damage is caused by the uncertainty of the negotiations, not the substantive impact of the eventual Brexit deal. Indeed, the OBR has made no change at all to its forecast for growth in GDP per capita in 2019 and 2020.
That can only makes sense if the UK remains in the single market, or negotiates some near-identical new relationship. So with the drum-beat quickening for an abrupt and extreme version of Brexit, much worse could be to come. The fiscal projections which seem so bleak today may well turn out to be an optimistic ‘best case’. Already they are more upbeat than those of many other forecasters.
That means that Mr Hammond failed today as a steward of the nation’s prosperity. The one thing he should have done was to rule out ‘hard’ Brexit, and promise instead to negotiate full market access to the EU. Without that pledge the forecasts for the economy and for family finances will carry on getting worse.
Even as things stand there is now a huge hole in the public finances. Mr Hammond actually chose to make it slightly worse in the short run, by deciding to increase capital spending. But he acted safe in the knowledge that productive investments pay for themselves in due course, increasing growth and reducing debt.
The scale of the new investment fund he announced will not be enough to significantly move the dial on growth, and beyond it the chancellor seems to have no more answers than his predecessor to Britain’s productivity crisis. Private investment and exports are too low. The economy is geographically unbalanced. And house prices were today forecast to rise even faster than before. After six years in power, this economic under-performance is of the Tories’ own making.
Apart from capital spending, the statement brought almost no change to taxation and expenditure. The only revision to tax or current spending worth more than £1 billion was the Spring climb-down on Personal Independence Payment, which now feels like ancient history.
On fiscal policy, Mr Hammond is therefore Osborne Mark II, and a ‘continuity’ chancellor means an ‘inequality’ chancellor. After the 2015 election Hammond’s predecessor deliberately decided to increase inequality, by cutting social security for households in the bottom half of the income distribution; while reducing taxes for those in the top half.
Despite some tweaks at the margins, that plan remains in place. Universal credit is being cut significantly and the value of all working-age benefits has been frozen, despite inflation now rising. Meanwhile the income tax personal allowance and the threshold for the 40p tax-band are increasing.
And the chancellor even refused to budge on Mr Osborne’s plans for public services, apart from raiding the international development budget to pay for prison staff. In particular, there was no relief for NHS and social care budgets in England. This was a risky move, since the evidence from the delayed discharge statistics suggests that the health and care system has finally reached a tipping point.
After today, Phillip Hammond and Theresa May now ‘own’ health spending and responsibility for anything that goes wrong this winter will be laid at their door. But maybe they won’t even notice, because each major issue of social policy now seems trivial compared to the challenge of Brexit. Today proved that leaving the EU has the potential to become the greatest peacetime crisis Britain has ever faced.