BILL JAMIESON NOVEMBER 22 2016
Bold new initiatives…challenging fresh targets…radical strategies… stimulus here, stimulus there: a modern-day chancellor’s set-piece is hardly complete without frenetic speculation of big radical measures in store.
It’s surely time we dropped all this and stripped those set-pieces back to their original succinctness and simplicity. And with one big exception, chancellor Philip Hammond should ignore the special pleading calls for immediate big spending measures – especially those dressed up as an “economic strategy”.
Budget set-pieces have now come to resemble a Victorian drawing room filled with ornamental clutter, chinaware, vases on every bandy-legged sideboard and furniture with no evident function or purpose.
Gordon Brown was the maestro of budgets bristling with minutely targeted changes to the tax and benefits system and changes flagged up years ahead of their implementation. New “spend-to-invest” announcements also crowded his speeches.
George Osborne followed suit. Budgets once intended to be focused on economic growth became a political playground with all manner of micro changes that came to dominate the next day’s headlines. Some of it had to do with economics. But much of it was … pure politics.
Hammond now has an opportunity to reset the Autumn Statement tomorrow with a presentation refreshingly free of this obsessive-compulsive stimulus disorder.
He is chided for being dull and boring. In truth, his greatest asset is that he is dull and boring. And an Autumn Statement befitting his character is long overdue.
Almost immediately in the wake of the Brexit vote there was a tidal wave of expectation about a “big stimulus Autumn Statement” – stimulus measures, reflationary spending, billions for infrastructure projects to stave off a recession that was almost certain to follow in the immediate wake of the referendum result.
Did not the Treasury, the Bank of England, the IMF, the National Institute for Economic and Social Research and our very own Fraser of Allander Institute warn of a business and household spending slump, rising unemployment, a plunge in investment and looming recession?
Well, as it turned out, none of this came to pass. Unemployment did not soar, it fell. Household spending did not collapse. It rose by its fastest in 14 years last month. Companies have not fled the UK. In fact Google and Facebook have recently announced big investment here.
And while there are big uncertainties ahead over Brexit – even as to whether there will be a Brexit at all – the case for immediate fiscal stimulus has shrunk.
What certainly hasn’t shrunk is government borrowing. This continues to rise well above forecasts given at the time of the last Budget – proving, once again, to be the most perishable item in the Treasury’s larder of items well beyond their sell-by date (that, of course, and those much-vaunted “strategies” that barely survive till the next Budget).
But there is one area where there is a compelling case for Hammond to take action: easing the pressures on household budgets ahead of an intensifying squeeze next year and beyond.
Much has already been written about the plight of the “Just About Managing” or JAMS. The weaker pound is set to push up inflation while pay growth lags. Other cost of living rises are coming down the track.
For example, big statutory increases in auto-enrolment workplace pension contributions are in the pipeline for 2018 and 2019. The minimum total contributions are set to increase from the current 0.8 per cent of qualifying earnings to 2.4 per cent in April 2018 and then to four per cent in April 2019.
Household incomes are set to be further squeezed by rising council tax – potentially up to £170 million a year from next spring – and all this while wage growth here in Scotland lags that of the UK overall.
Hammond thus needs not just to honour Tory manifesto commitments to raise the income tax threshold to £12,500 by 2020 and to raise to £50,000 the threshold for the 40p higher rate of tax but to do so with immediate effect.
Perversely, the Scottish government has pledged to maintain the current tax thresholds for higher earners – a tax increase in effect relative to south of the Border.
The economy will need all the help in can get from the household sector. The OBR is expected to downgrade its GDP growth forecasts, possibly to about 1.3 per cent for 2017 (2.2 per cent in the March Budget) and to about 1.5 per cent for 2018 (previously 2.1 per cent).
As a result of these lower growth predictions, the IFS estimates that there will be a cumulative worsening in borrowing between the 2016 financial year and 2019 (inclusive) of around £62 billion, compared with the OBR’s March forecasts.
That is a compelling reason why infrastructure spending boosts should be limited to improving roads and maintaining existing commitments to help new housebuilding.
The priority should be the JAMS – and jam today lest Hammond breeds a swarm of angry wasps.