Big Brexit, little chancellor

Big Brexit, little chancellor

Philip Hammond will run a less visible, more ‘grown-up’ outfit than his predecessor George Osborne.

By TOM MCTAGUE 9/9/16, 5:30 AM CET

http://www.politico.eu/article/philip-hammond-britains-grown-up-chancellor-uk/

LONDON – Philip Hammond has a Brexit plan that will infuriate Brussels. The open question is whether the U.K. chancellor is politically strong enough at home to force it through.

Britain, the country’s finance minister believes, should sit back and let the Brexit lobbying frenzy commence. With a trade deficit with the EU running at almost £70 billion, the U.K. has time on its side and can secure access to the EU single market outside the club, he has privately told colleagues.

His views contrast with the more strident Brexiteers in the government, who are wary of any deal with Brussels, eager to leave the EU and dismissive of worries about the economic shock to the U.K. cut off from the single market. Those influential voices include a trio of hardliners in other key jobs in Theresa May’s cabinet.

Sounding more open to a compromise with Brussels than they are, the chancellor insists European industry is “desperate” to maintain free trade and will increasingly make its voice heard in continental capitals as the Brexit negotiation moves into focus, according to Westminster sources familiar with his thinking. By that logic, the longer Britain waits, the more pressure there will be to maintain the status quo.

As soon as Article 50 is triggered next year, the U.K. can also begin trade talks with a host of other world powers, Hammond has told Westminster sources, despite EU claims that it would be illegal. The U.S., Canada, Japan, China, India and Australia have begun making quiet overtures about opening up trade talks, senior Treasury sources said.

Hammond’s handicap in carrying this strategy out is that for the first time since the 1960s, the chancellor’s cabinet supremacy over U.K. economic strategy is being challenged. Not since Harold Wilson’s ill-fated attempt to create a rival department for economic affairs has the preeminence of Britain’s all-powerful Treasury been called into question.

In May’s team of rivals, Brexit Secretary David Davis wants an end to the right of EU citizens to live and work freely in the U.K., even if that means losing British access to the single market, and is running the department tasked with drawing up the U.K.’s exit plan. Liam Fox, the trade minister, and Foreign Secretary Boris Johnson are also lined up against Hammond on Brexit and trade.

“Some of the rhetoric we are seeing about a ‘Brexit boost’ is worrying. The early data we’ve seen does not suggest that.” — Treasury official

While Prime Minister May rates Hammond, and promoted him from the Foreign Office in the previous cabinet, she is skeptical about the overweening power of his department, according to interviews with senior government figures. Hammond’s predecessors ranged across government as deputy prime minister in all but name. Britain’s new prime minister wants a chancellor focused only on his day job.

So, while the chancellor may have a plan to guide Britain painlessly out of the EU without tipping the economy into recession, he may not be strong enough to deliver it. How the traditionally second-most important person in British politics fares in coming months will help determine the shape of the divorce deal with Brussels and Britain’s relations with the world after quitting the EU.

Hammond’s tightrope

Two months into the job Hammond finds himself hemmed in between economic necessity and post-Brexit political reality. On one side, May has left him in little doubt that he must do whatever it takes to keep the economy afloat as Britain negotiates its EU exit. On the other, he finds himself in a battle to protect the economy with one arm tied behind his back, hampered by his referendum support for Remain, which has left him vulnerable to accusations from Euroskeptics of overreacting to economic turbulence.

Hammond’s history as an advocate for remaining in the EU has left him limited room for maneuver. Any hint of economic pessimism is met with murmurings of dissent and accusations of “talking the economy down.”

In the run up to the referendum, ardent Euroskeptics threatened to vote against mooted budget cuts that would be necessary after a Brexit downturn, claiming it amounted to “punishment” for voting the wrong way.

Yet with the U.K. government deficit hovering at around £74 billion, Britain cannot afford another recession.

Hammond may introduce multi-year budgets to allow government departments to take a longer term approach.

Veteran Eurosceptic backbencher and Davis ally John Redwood insists there is no need for the Treasury to take any additional measures in the wake of referendum result. “I see no circumstances where the Brexit vote can cause a recession in the U.K,” he said. The former Tory leadership contender added that Hammond’s Treasury was continuing to look at everything through “ridiculously pessimistic Brexit glasses” and said there was no evidence to support concerns about a possible downturn.

Redwood said some big businesses had delayed investment decisions in the U.K. but insisted consumer confidence remained high and most of the economic data pointed to healthy growth. He also criticized the Bank of England for carrying out a “needless” stimulus in the wake of the referendum and maintained that the previous forecast of 2.2 percent growth in 2017 was “perfectly good.”

Claims that Britain’s economy has calmly sailed through storm Brexit is causing dismay in the Treasury. And the chancellor is far more concerned than he lets on, senior Treasury sources said.

In private Hammond says the economy, while performing better than expected, will remain “fragile” for years to come and will need “careful” support throughout the Brexit process. “Some of the rhetoric we are seeing about a ‘Brexit boost’ is worrying,” a Treasury source added. “The early data we’ve seen does not suggest that.”

Despite some positive economic figures — notably the increase in consumer spending over the summer and Monday’s bullish service sector PMI data pointing to a growing economy — the Treasury remains braced for a “significant slowdown” and possible recession, senior sources said. Business investment figures are a particular cause for concern.

The Treasury is still weighing the need for fiscal stimulus to complement the Bank of England’s monetary boost, despite a number of banks reversing their forecast for a Brexit-induced recession. A final decision is not expected until much closer to the Tory conference in October.

Hammond’s first concrete tax and spending measures will be laid out in the Autumn Statement on November 23.

The chancellor is considering one major policy change: the introduction of multi-year budgets to allow government departments to take a longer term approach, according to a senior government source.

The radical move, which has been the dream of big-spending departments, would show the Treasury is still capable of bold reforms, despite the limitations imposed by Brexit and Hammond’s own perceived political weakness.

Diminished authority

By May’s design, Hammond is a far more restricted chancellor than Britain has grown used to. The prime minister sees the chancellor as an ally, but is skeptical of the power of the Treasury.

May has been damning about the department’s record under her predecessor David Cameron. In her opening pitch for the Tory leadership she lambasted Britain’s “striking” lack of economic reform over the past six years.

Osborne held twice daily meetings with Cameron. Hammond is limited to one regular weekly face-to-face with his prime minister.

Gordon Brown used the department as a virtual opposition administration to Tony Blair’s. George Osborne went further — all but running the government for Cameron. “David was like a non-exec chairman,” one veteran Tory MP said. “George was the government’s chief executive.”

When she appointed Hammond, May left him in no doubt what was expected. Alongside every other cabinet minister, the chancellor was given personal instructions from the prime minister. Hammond must prioritize growth and any spare cash must go to the poor. Austerity can wait, for now.

Osborne’s carte blanche over economic affairs has been thrown in the bin. The twice daily meetings between Cameron and his former chancellor have been scrapped. Hammond is now restricted to one regular weekly face-to-face in Number 10, senior sources revealed. His weakness is that he is simply May’s chancellor. Unlike his predecessors, he is not his boss’s political strategist or confidant.

“The chancellor and the Treasury will find a pretty strong ally in the prime minister in maintaining growth. I wouldn’t write the Treasury off yet.” — Jonathan Powell

Treasury aides insist this shows confidence in their man. Number 10’s explanation is more cutting. “They are not a duo,” one Downing Street source said bluntly when asked about the political partnership.

The new prime minister has also created a rival power base for economic reform: Greg Clarke’s giant new department for business, energy and industrial strategy, a throwback to Wilson’s department for economic affairs.

And yet, despite May’s reservations about the Treasury, Hammond is a chancellor she trusts, according to Downing Street sources.

The pair mixed in the same social circles at Oxford a decade before Cameron and Osborne arrived. They are both forthright, unshowy Conservatives from middle-class backgrounds with a reputation for quiet competence.

Hammond has risen through the ranks of government without a major gaffe or scandal. A successful businessman, he made millions from a property firm before entering parliament in 1997.

His most important attribute, some speculate, is that he poses no threat. At 60, Hammond has no political ambitions beyond the Treasury. “It’s his last job in government,” a senior Treasury source said. “He has no aspirations to be leader.”

Hammond will not use the position to grandstand or position himself for further advancement, Downing Street believes. A Number 10 aide said Hammond’s tenure at the Treasury — in contrast to Osborne’s — would be “grown-up, or just professional,” exposing the continuing disdain for the former chancellor.

“You can expect much more workmanlike [House of Commons] statements. No rabbits or political traps, that kind of thing,” a senior source close to the chancellor agreed.

The chancellor himself is also keen to distance himself from his predecessor. “I won’t be wearing high-viz everyday,” he has joked to friends about Osborne’s habit of being pictured at building sites.

Power of the purse

Despite the apparent weakness of his position, senior figures in previous administrations believe Hammond will regain the initiative over time.

“Reports of the Treasury’s demise are common and usually premature,” said a senior former Labour cabinet minister. “Philip Hammond is a fairly assertive politician and I don’t think he will let himself be knocked around by the others.”

Hammond, he added, would force his way into almost every decision on Brexit: “Most of the agreements with Brussels will inevitably involve the Treasury because they will involve money.”

He said May’s primary purpose in setting up the Department for Brexit was not to challenge the Treasury, but to ensure that “any betrayals come from them [the Euroskeptics].”

In the upcoming battle for supremacy between Hammond and the three Brexiteers, the senior former cabinet minister only saw one winner. “I would put money on the prime minister and chancellor team over any other, and I think I could go out and buy a drink on the strength of that bet before it had even paid out.”

Jonathan Powell, Tony Blair’s former chief of staff, agreed. “I think the chancellor and the Treasury will find a pretty strong ally in the prime minister in maintaining growth,” he said.

“The Treasury has been much underestimated in the past,” Powell said. “They control funding as well as the macroeconomic. When they gave up control of the Bank of England, that was supposed to constrain them, but it didn’t. I wouldn’t write the Treasury off yet.”