Philip
Hammond boosted by Brexit black hole
The
UK economy will take a £122 billion hit. But the chancellor of the
exchequer could be forgiven for enjoying himself.
By ALEX SPENCE AND
CHARLIE COOPER 11/23/16, 11:40 PM CET Updated 11/25/16, 4:25 PM CET
LONDON – For a man
informing Britain that its economy will take a £122 billion hit,
Philip Hammond could be forgiven for enjoying himself.
The chancellor of
the exchequer, known in political circles as “spreadsheet Phil,”
broke the news to MPs that the cost of Brexit, as measured by the
increase in government borrowing needed to mitigate against its
effects, will be a cool £59 billion over five years.
In the first major
economic announcement from the government of Prime Minister Theresa
May, the chancellor delivered a gloomy message, revealing that
Britain’s economy is set for a period of lower than forecast
growth, higher borrowing and a squeeze on household finances.
Yet Hammond could
relish the occasion. Despite the miserable figures calculated for the
Treasury by the independent Office for Budget Responsibility (OBR),
Wednesday’s Autumn Statement, a budget in all but name, will
strengthen Hammond’s hand in the battle over Britain’s withdrawal
from the European Union.
On the most basic
level, Hammond’s dull but competent performance boosts his own
authority within government. He’s a novice chancellor, but he
projects grown-up competence at a time when the nation craves
reassurance. What’s more, such grim figures underline Hammond’s
argument that Britain can’t risk a “hard” departure from the
Union.
Reckoning with
reality
The chancellor has
been on the back foot since his appointment following June’s
referendum.
The economy hasn’t
performed as badly as some analysts — notably those in the
Treasury, under Hammond’s predecessor George Osborne — predicted.
Britain hasn’t tipped into recession. To Euroskeptics, this
so-called “Brexit bounce” is evidence that the U.K. can thrive
outside the Union.
The measured
statement, from the cabinet’s leading “soft Brexit” voice,
looked like a shrewd exercise in managing the country’s
expectations.
“It’s a
reflection of the resilience of the economy and that Brexit is not
proving to be the economic catastrophe many on the Remain side were
predicting,” Suella Fernandes, the MP who led a group of 60
Euroskeptics in calling last week for a clean break from the single
market and the customs union, told POLITICO.
All summer,
Euroskeptics voiced frustration at the so-called “Bremoaners,”
who, as veteran Euroskeptic backbencher John Redwood said of the
Treasury, continued to look at everything through “ridiculously
pessimistic Brexit glasses.”
The OBR projections
make it difficult to argue that the British economy looks anything
other than fragile — and many ordinary people who voted for Brexit
stand to be the worst hit.
Perhaps the most
eye-watering statistic to emerge from the OBR’s 271-page forecast,
was the £22o billion additional borrowing by 2020, compared to the
OBR’s pre-referendum projections. Significantly for a budget that
was supposed to help working men and women, real earnings growth is
projected to slow to almost zero next year.
“We are in for a
long decade of austerity,” said one minister on the soft Brexit
side of the debate. “Hardcore Brexiteers see any reckoning with
reality as subverting the Brexit argument. Talking about the fiscal
debt pile getting worse is not something they want to hear, but
that’s the reality.”
The measured
statement, from the cabinet’s leading “soft Brexit” voice,
looked like a shrewd exercise in managing the country’s
expectations, as well as a warning to Hammond’s hard-line
colleagues pushing for a withdrawal from the single market and
customs union that Britain can ill-afford such a leap in the dark.
“He’s going to
dish the medicine and call it as he sees it, not play politics with
it,” said the minister, speaking on condition of anonymity. “He
is hamming up the ‘spreadsheet Phil’ image because that is his
protection in the cabinet.”
With the
deteriorating public finances giving Hammond little wiggle-room,
there were few of the vote-grabbing policy treats that previous
chancellors such as George Osborne and Gordon Brown liked to sprinkle
through their Budgets and Autumn Statements.
To the extent there
were concessions, they were targeted at blue collar workers, those
“just about managing” now known in Westminster as Jams: £1.4
billion for 40,000 affordable homes, banning letting agents’ fees,
a reduction in the rate at which benefits are withdrawn from people
once they start working.
Some Tory MPs —
especially those who, like both May and Hammond, backed remaining in
the EU — worry that many people voted to leave not just as a way of
thumbing their noses at the political classes, but in the hope it
would deliver money in their pockets. Left behind by globalization,
these voters believed (and were told during the campaign) that they
would get cheaper homes, more money for health services and shorter
waiting lists for schools and public services if Britain left the EU
because there would be fewer immigrants competing for resources.
“Brexit won’t
deliver those things. How are the public going to feel when they
discover that?” said one senior Conservative MP.
Downing Street hopes
the Jams strategy will ensure that Brexit voters feel like something
has improved, despite a tight budget.
Others doubt such
measures will make much difference in the long run.
“The government is
traveling without a road map on Brexit and has now provided no more
than a few pea shooter tweaks to alleviate the plight of people who
are feeling the pressure,” former Deputy Prime Minister Nick Clegg
told POLITICO. “The idea that anything in this Autumn Statement
could in any way materially offset the very real squeeze that is now
impending for household finances and public services is
self-evidently laughable.”
Clegg said he was
“extremely worried” by Wednesday’s figures.
“These official
forecasts have been horribly wrong this year, and there is no sign
that they are learning their lesson and focusing on the data” —
Professor Patrick Minford
In his view,
anything other than a soft Brexit will be catastrophic for the
livelihoods of families struggling to get by. “I hope we will dodge
the bullet but the underlying figures from the OBR just add to my
concern that we are in a more perilous position economically over the
next year or two probably than at any time since the 2008 crash,”
he said.
Doubting the
forecasts
Euroskeptics cast
the OBR — and, by extension, Hammond himself — as too
pessimistic. The Economists for Brexit group, co-chaired by Boris
Johnson’s ex-economics adviser Gerard Lyons, was strident in its
criticism.
“These official
forecasts have been horribly wrong this year, and there is no sign
that they are learning their lesson and focusing on the data, rather
than vague guesswork about emotions,” said Professor Patrick
Minford, co-chair of the group. “The irony is that much of this
so-called uncertainty in the U.K. economy is, in fact, being driven
by these pessimistic forecasts making worse-case assumptions.”
On Minford’s
analysis, Britain’s GDP would grow by 4 percent over the long term
if it leaves the single market and strikes its own trade deals under
World Trade Organization rules.
The OBR didn’t
seem entirely sure of its own assessment, adding huge caveats to its
forecasts.
Its assumptions
about Britain’s post-Brexit trading arrangements, the confidence of
overseas investors, business investment, and the impact of the fall
in sterling on consumer prices, were all uncertain.
“There is little
by way of precedent to guide the assumptions that have been factored
into our forecast, so invariably future forecasts will need to be
revised as we learn more about how policy will change and how the
economy will respond,” their outlook said.
Britain is heading
down an uncertain road, and nobody knows exactly where it will lead,
or how much pain it will suffer along the way. As for Hammond, he’ll
walk that road with a little more spring in his step. At least for
today.
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