8 Mar 2017

Budget 2017 analysis by Hanover Senior Adviser Steve Richards

On one level, Philip Hammond delivered an historic budget. Hammond is the Chancellor who unveiled the last financial statement before the UK Government begins to negotiate the country’s withdrawal from the European Union. But it is that wider background of tumultuous significance that explains why the actual proposals in his address were small, the equivalent of sticking plasters.

In the Treasury, they are awaiting the triggering of Article 50 with some nervousness. As one senior official joked to me: “Thank goodness we’ve got two budgets this year”. He anticipates that the one Hammond will deliver in November will be more substantial. By then, the Chancellor will have some sense of how the economy is coping with the early phase of the Brexit negotiations. He has no such sense at the moment. 

Even the Office for Budget Responsibility hedges its bets when forecasting future growth rates. As predicted, the OBR has revised its previously pessimistic projections dramatically upwards for this coming year and the next. Brexit crusaders will make much of the revisions. But looking further ahead to 2020 and 2021, the OBR sticks to its forecasts made in the aftermath of the referendum. In other words, neither it nor the Chancellor or Prime Minister can be sure about the impact of Brexit by the end of this parliament and the beginning of the next. The OBR accepts it was unduly negative in its assessment of the immediate impact on the economy of the referendum result last June. It does not revise its judgement on how the economy will grow post-Brexit.

The sticking plasters are important even if they were all billed in advance. There is some help for businesses, especially small businesses, facing large rate rises. The additional funding for easing the impact of revaluating business properties is £435m. Some of the cash will be made available to local authorities who will be tasked with deciding which businesses in their area should be helped. Hammond pledged a longer-term review of business rates, one that will also look at how online businesses can be taxed. 

As expected, around £2bn is allocated for social care. A small sum of £100m was earmarked for A&E provision, to be in place by next winter. NHS England’s head, Simon Stevens, has said publicly that much larger sums are required urgently. George Osborne and Stevens had a good rapport. Stevens’ relationship with Hammond, and indeed with Number Ten, is much more distant.  

In theory, Hammond had an additional £60bn to spend on the basis of the OBR’s revised forecast for the coming year. He chose not to spend it. Although he abandoned Osborne’s election pledge to balance the books by the end of this parliament, the Chancellor is more cautious than his predecessor. When Osborne found some spare cash, he would often spend it and make a dramatic announcement to accompany the expenditure. In this eve-of-Article 50 budget, there was emphatically no headline-grabbing flourish. Indeed, the lack of such a headline-grabbing initiative was the main headline.

The language of Hammond’s budget was more illuminating than the substance. The term ‘fair’ or ‘fairness’ was repeated several times. He constantly reiterated that this was a government for hard working families. Both were themes of Theresa May’s party conference speech. Hammond is happy to use May’s language but he views warily some of the more radical ideas from her senior advisers, especially in relation to industrial strategy and devolution.

In the budget, Hammond highlighted the Midlands Engine to complement Osborne’s Northern Powerhouse. Number Ten is keen for equivalents of the Northern Powerhouse to be established around the country. But the Treasury will devolve power and spending with many strings attached. Power is being devolved very incrementally. 

In closing, Hammond stated that the country was about to begin a new chapter in its history. He is not the type to take risks as the chapter opens. In spite of the parliamentary turbulence, May is still confident she will trigger Article 50 this month. The Treasury worries that there could be an immediate fall in the value of the pound. After that, Hammond will be keeping his fingers crossed.

His performance in the Commons was relaxed, witty and authoritative. Whether he is able to display such characteristics in the future will depend on how the UK economy responds to Brexit. Compared with some of the gung-ho Tory Brexiteers, mainly on the backbenches rather than in the Government,  Hammond is on the cautious end of expectations. He hopes and believes the transition could go smoothly. But he knows it might not do so. A budget on the edge of history will not be remembered for very long.