Penfold Associates

The Chancellor was in a very difficult position preparing this Budget. He was under political pressure from within his own party to deliver something positive at this stage in the Brexit negotiations. He was allegedly in danger of losing his job if he stuck to the very steady and cautious approach for which he is renowned. He also needed to avoid policies that would unravel quickly like his National Insurance proposals for the self-employed did in March. In the event, he seems to have survived.

Mr Hammond has not broken with austerity in the way Labour would want but he has (as in most recent Budgets) pushed deficit elimination further into the future. He has provided resources to ease some of the administrative problems with Universal Credit although he has not made the (politically difficult) decision to halt its roll out even temporarily. He gave some cash relief to the NHS, although not as much as health service managers say is necessary, and gave the NHS a capital boost. His speech majored on technological change and modernising the economy – very necessary whatever form Brexit takes.

The Chancellor’s big spending announcements (saved for the end of his speech) were all about housing. The stamp duty relief will be welcomed by the first-time buyers who benefit even if it will not produce a single extra house and even if it will contribute to house price inflation in the medium term. It has to be said that much of the £44Bn headline figure is simply a re-packaging of existing schemes already in the pipeline – including, for instance, the extra £2Bn for affordable housing already announced by the Prime Minister. There appears to be approximately £15Bn of additional spending to help address his 300,000 extra dwellings a year target. Much of this is on demand side interventions rather than directly increasing supply and this is still a major weakness. However, on balance this is probably the best package for housing that could be expected from this Chancellor at this time.

The Chancellor’s task was made more difficult by the revised economic forecasts from the Office for Budget Responsibility (OBR). The reduced prediction for GDP growth is to be expected at this stage in the Brexit talks and is probably exacerbated by the slow pace of those talks and the associated uncertainty. The most damning part of OBR’s analysis, however, relates to productivity. OBR had previously persisted in forecasting that productivity improvement would return to the pre-crisis 2% per annum average but this has not happened yet and OBR has now accepted that it will continue at about 1% for some time. This restricts growth, restricts wage increases, and restricts tax revenue. Since the recession the UK has done remarkably well in increasing the number of jobs and keeping employment down but this has been at the expense of investment in skills and technology that would boost productivity. This explains the Chancellor’s obsession with promoting research and development.

Although there are still cuts in the system, the Chancellor responded to the problems facing him with a little more spending and borrowing. This is a slightly more Keynesian approach and moves away from the view of his predecessor that more cuts will bring more growth. The Chancellor has, of course, not changed direction to the degree that the Labour Opposition would favour.

Kim Penfold
November 2017