Philip Hammond would be wise to release the constraints on public spending slightly, but too much risks conceding the argument to a Corbyn-led Labour party that increasing public debt does not matter, argues Tom Pridham.

This year’s budget is unusual for two connected reasons; firstly, the volatile position of the Chancellor himself. Over recent weeks his position seemed to have strengthened, if only due to not being implicated in allegations of misconduct. It would have been reasonable to assume that the Prime Minister would have become more inclined to keep Hammond in post with other Cabinet ministers being dismissed or in jeopardy. However, the weekend’s events have called that assumption into question. Firstly there have been briefings from various sources suggesting Hammond’s position is vulnerable. This was compounded by his statement on the Marr Show that ‘there are no unemployed people’. Though this must be viewed in the context of his overall point that technological change need not cause unemployment, it was a careless choice of words that perhaps betray his sense of unease.

This Budget also has the unusual feeling of a short-term gambit. Stepping back and considering Brexit adds additional uncertainty to that created by Hammond’s position. Whilst most Budgets are long-term events allowing the Government, and the Chancellor, to outline their strategic economic vision, this year’s event feels more like a last throw of the dice. It is very possible that by the New Year, Hammond will be a backbencher and the measures he sets out will be blown off course by the latest developments in the Brexit negotiations. This may give Hammond a certain freedom but may also compel him to make decisions which undermine both his, and the Conservative Party’s, strengths.

There is growing pressure on the Chancellor to increase spending. This is not just emanating from the Labour Party but from individuals within the Conservative Party such as Nick Boles and, not least, the Prime Minister herself. While some targeted increases may have considerable political merit, especially in the short term, Hammond must beware of increasing spending to the extent that it undermines the Conservative reputation for fiscal responsibility. As events of the early and mid-1990s demonstrated, it is when this reputation is compromised that the Party suffers most electorally. Any giveaways must be targeted and/or offset by measures elsewhere.

One measure trailed is the abolition of stamp duty for first time buyers. This is sensible and will reduce the burden on younger people trying to gain economic security. However, if enacted as a standalone measure, it will have only a marginal impact.  House prices may remain prohibitive and many will still spend half their wages on rent, making them unable to save for a deposit. The real issue is supply and it is thus crucial that planning laws are liberalised. This does not mean abandoning the green belt entirely but it may mean allowing building on parts of it close to transport links. The Government should also incentivise quick building when planning permission is granted. This could be enacted in a variety of ways including guaranteed fast-tracking of applications or tax breaks for developers who agree to have houses on the market within a given time period. However it is done, building must be sped up.

It would also be worthwhile looking again at the social care subsidy, AKA ‘the dementia tax’. The core idea was sound however the Conservative manifesto neglected to include a cap and the campaign failed to frame the issue as one of intergenerational inequality. It is younger people who will suffer the most if the system is not changed as they will shoulder the burden through taxation and find themselves facing a broken system when they become old. This should be revived but with a portion of the savings being channelled toward measures assisting first time buyers such as the aforementioned abolition of stamp duty. The link to greater intergenerational equality will therefore be explicit and the policy easier to defend.

It appears likely that there may be movement on public sector pay. If pursued, it must be done carefully. Firstly, it must be targeted at those who currently earn the least and who struggle to make a decent living. Secondly, it must in some way be tied to inflation. If the right balance is found it would allow the Government to demonstrate that it is willing to relax certain austerity measures in a targeted manner but not undermine the overall, and still necessary, commitment to fiscal responsibility.

The dilemma facing Hammond is complex and multi-faceted and the pressure may well compel him to release constraints on spending entirely. Whilst a slight relaxation is sensible, too much risks conceding the argument to a Corbyn-led Labour party that increasing debt does not matter, thus undermining the Conservative Party’s reputation for fiscal responsibility. The sensible course is targeted spending increases alongside explicit redistribution between generations. However, whatever he announces, the odds are in favour of this being Hammond’s final budget.

 

 

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