The best way of considering Philip Hammond’s first Autumn Statement – like other such statements and budgets before it – is with a scepticism about forecasts and humility about the future. Forecasts first. George Osborne said pre-referendum that a Brexit vote would “represent an immediate and profound shock to our economy. That shock would push our economy into a recession”. In October, it was reported that the economy grew by 0.5 per cent in this year’s third quarter. Mark Carney warned of a “technical recession”. But earlier this month, the Bank of England made its biggest upgrade to a growth forecast ever. The IMF was more lurid – claiming that house prices would crumble, that shares would crash and that, yes, that recession would happen. It later conceded that Britain will be the fastest-growing major economy this year.
This is not to say that Brexit will be painless – far from it. But it is to put into context the forecasts of lower growth and higher borrowing from Office for Budget Responsibility which the Chancellor will cite. Growth may come in even lower and borrowing even higher, or the reverse may turn out to be true. With the world as it is, we simply do not know. The markets could take fright at Britain’s debt-to-GDP ratio, as Hammond recently warned the 1922 Committee. Or banks could crash in the Eurozone, Donald Trump could spook the markets, and Britain could continue be seen as a safe haven. The pound could stay low, setting off a inflationary wave (and an export boom). Or these events and others – a good result for Marine Le Pen; Matteo Renzi losing his referendum in Italy; a surge by the AfD in Germany next autumn; turbulence in eastern Europe – could send it upwards again.
The Chancellor would therefore be wise, in preparing for his big set-piece debut on Wednesday, to start from what we do know – namely, that the economy is growing faster than many expected, and that Brexit, the biggest political event in his and our lifetime, requires him to build flexibility into his plans. He has no alternative but to produce a suck-it-and-see Autumn Statement. Business needs reassurance, but not dramatic measures that would smack less of resolution than of panic. The growth of public spending needs reining in, but the best moment in the electoral cycle to do so was missed by George Osborne last year, as we said at the time. Savers would like to see higher interest rates, but a sharp spike in these could bring downturn and recession – a reason why Hammond cannot simply go an infrastructure borrowing ramp.
In short, the Chancellor must play it by ear. He must make it clear that the Treasury’s focus is now on getting the economy right rather than managing political strategy. He should look again at the resilience of our financial system, and ask whether the Bank of England is accountable enough. He must produce a fiscal framework firm enough to give the markets confidence that he has a plan, but not so inflexible as to deny him room for manouevre if growth falls short. He should deliver some modest tax cuts for businesses (business rates could usefully be revisited), but save some up for a rainy day – if it becomes evident, for example, that those negotiating Brexit with us are seeking a punitive settlement. He should concentrate infrastucture spending less on grands projets, and more on smaller “shovel-ready” road and rail schemes. There will be a Housing White Paper.
As far as the “Just-About Managings”, or JAMs, are concerned, he should be looking for jam tomorrow, not today. All the usual lobbyists are out, demanding cuts in fuel duty, stamp duty, air passenger duty, higher income tax thresholds, reductions in the 40p rate, and anything that takes their fancy (whether the measures in question would benefit poorer voters or not). This is not the point in the political cycle for making large-scale cuts in personal taxes – especially when the stuctural deficit remains untamed and growth is buoyant. Hammond will also be required to advance the Prime Minister’s industrial strategy, in the wake of her speech to the CBI today. If it means investing in vocational education, training, skills, and raising human capital, the Chancellor may begin to solve the productivity problem that he clearly wants to solve. If it dissolves into picking winners, it will not.
George Osborne didn’t abolish the structural deficit – but he did at least deliver growth and deficit reduction when his critics said he would fail. This was no mean achievement. Hammond has the chance on Wednesday to project his own priorities and personality: to be fixed more on economic growth than electoral outcomes; to bring his experience as a successful businessman to bear; to strip out from his statement the gimmicks that sometimes marred his predecessor’s. He must also meet a challenge far, far bigger: one that would have daunted even his most powerful and creative Conservative predecessors – the Rab Butlers and Nigel Lawsons. He must convey a sense of what he and Theresa May want Britain to look and be like after Brexit. The Prime Minister will make a start today by saying she wants “the UK to have the lowest corporate tax rate in the G20”.
To be sure, the Chancellor is in no position to spell out what Britain’s corporation tax rate (say) will be post-Brexit, what free trade deals will be in place, at what level which tarrifs will be set, or what our regulatory regime will look like. But he can give a sense of the kind of outcome he wants. On regulation, for example, there is no reason why he should not announce that a task force will be set up to report in 2019 – or before in stages if that is considered politically wise. Or on tarrifs, he could point to the intended direction of travel. There is a kind of double helix at the core of this Autumn Statement, or should be. One strand should be discreet, cautious, exploratory, with with escape hatches and exit doors carefully prepared. The other should be visionary and bold. To perhaps the least pulse-quickening politician in Britain falls the task of combining both.