The speech from Philip Hammond to the Conservative Party Conference his morning, his fast as the Chancellor of Exchequer, was reassuringly boring. It was long but said little – at least in the journalistic sense of offering any new announcements or controversial arguments. I’m sure this was deliberate. Hammond gave the game away when he said: “I know that productivity doesn’t necessarily set political pulses racing…”
George Osborne has made way for an older man. Combined with the switch in Prime Minister to a no nonsense figure we have the sense of a Government of grown ups. Less concern is taken with the jokes (Hammond’s offering was that Ed Balls was chosen in preference to Jeremy Corbyn for Strictly Come Dancing as the latter has two left feet – badum tish). Hammond’s focus is less political than Osborne’s. Less about media management. Instead encapsulating the new mood we had a solid speech about dry economics, steady as you go stuff. Given all the turbulence of recent months that was no harm. Perversely it may be more effective in media and political terms than Osborne’s gimmickry which would then come unstuck.
Yet how does it square up to the reality?
Back in March the Office of Budgetary Responsibility predicted growth this year of two per cent. In the three months April – June we have discovered that the economy grew by 0.7 per cent which would imply a rather higher annual rate than the OBR forecast. The alphabet soup of “experts” cut their growth forecasts after the referendum but have since revised them back up.
Brexit is really the alibi for relaxing on the mission to achieve a balanced budget. Of course economic forecasters always get it wrong. But the consistent pattern of the Osborne years has been of profligacy not austerity. In 2009/10 the Government spent £673 billion. This year it is due to be £762 billion. Even allowing for inflation that is a spending increase. It suits everybody to talk about cuts. The BBC, pressure groups, trade unions and the Labour Party like to howl indignantly about them. The Conservatives pretend they have been tough and responsible in delivering them. Meanwhile spending goes up and up and up.
Osborne’s approach, which Hammond is continuing with, is to try to eliminate the deficit very slowly by keeping the rate of spending increases below the general rate of economic growth. Hammond is merely being more honest about the modesty (or “pragmatism” as he calls it) of this ambition. If Brexit spurs economic growth it will help, if it slows growth it will take longer. But the fundamental problem has been a complete failure to reverse the wasteful explosion in spending during the Blair/Brown years. If we had voted to Remain then Chancellor Osborne would have come up with some other excuse for further delay on balancing the budget. The diet is always going to start tomorrow.
As Mark Littlewood, Director General at the Institute of Economic Affairs, said today:
“The Chancellor is paying lip service to long-term economic prudence, but in reality the UK is settling down to become a high spend, high debt economy. The UK now has the fifth highest deficit in the OECD, just after Greece, Japan, Portugal and Spain.”
Spendthrift politicians seek to sound worthy usually talk about “investment” in “infrastructure”. That when we should really keep a tight grip of our wallets. It means absurdly extravagant vanity projects like HS2 – that no investor in his right mind would hope to get a return on in the real world.
Hammond spoke about the importance of increased productivity – that would be hard to dispute. But he implied that the way to achieve was through increased state intervention – an “industrial strategy” – rather than through the market. Adam Smith argued that the route to increased productivity was through specialisation, through trade. The problem with the state deciding to spend more on capital projects is that it makes it harder to achieve reduction in high levels of tax. A Conservative approach to increased productivity would involve lower tax to allow more room for business to invest in capital spending.
The Chancellor is to be commended on the serious tone of his speech. There was also a welcome and encouraging sign that he has come to terms with the UK ceasing to a member of the Single Market. But what the country is still waiting for is a Government with the self restraint to reduce spending so that the public finances are restored to health and that the burden on the wealth creating sector of the economy is reduced to a tolerable level.
Today’s speech suggests we will be waiting for quite some time to come.