UK public finances are way off course. But, despite the unsympathetic forces of a cynical state ranged against him, one well-meaning bean-counter is trying to survive in extreme adversity. It makes for a harrowing Ken Loach movie…
I’m appointed to make an assessment, Mr Hammond
When Philip Hammond MP, Chancellor of the Exchequer, stood up in the House of Commons yesterday afternoon to chart the course for the British economy over the coming Brexit-obsessed years, he did so as the first Chancellor for nearly 30 years who has no ambition to succeed his boss as Prime Minister[i]. This is an experienced and thoughtful man who – despite being on the wrong side of history (he was, and remains, a Remainer) – just wants to do the right thing. Although the right thing (like truth) is not a neutral concept.
Mr Hammond has been both Defence Secretary and Foreign Secretary, and he knows that this is his last big job in government. Mr Osborne, his predecessor, used his budgets and Autumn Statements to showcase his personal political manifesto. Prime Minister Cameron was happy with that: he assumed that his Bullingdon Club buddie would be his natural successor – and they genuinely liked one another. Gordon Brown, in contrast, wouldn’t even allow his boss, Tony Blair, to know the contents of his budgets until the morning before – when he would slam the draft budget statement on the PM’s desk and harrumph out. They didn’t like one another.
Mr Hammond’s striking characteristic is that he is an accountant – though one with intellectual depth.
Mr Hammond’s other striking characteristic is that he is an accountant – though one with intellectual depth. (He was also for a time a second-hand car dealer in leafy Essex, which in my book gives him street cred.) Accountants, unlike bankers and fund managers, while not the movers and shakers of history, tend to reflect how enterprises can be financed in a sustainable way. Mind you, they generally only end up on the board when things get really bad…
You must continue to look for work, Mr Hammond
Mr Hammond can’t quite work out what his major task is. Mr Osborne – for all his faults – was quite clear that the credibility of public finances must be restored; and he had some genuine notions about the need to repair the condition of the indigenous working classes. He greedily adopted the Lib-Dem policy of raising personal allowances – they went up from around £6,500 under Brown-Darling to £11,000 by the time he fell from grace. And he was aware of the need to reform a benefits system that subsidises the middle classes yet persecutes those at the very bottom.
But yesterday Mr Hammond didn’t exhibit any clear fiscal priorities – except, perhaps, to navigate the nation through the miasma of Brexit (as he sees it – I’ll explain soon why the exit is actually illuminated in neon). He showed no insight into the most critical issue which confronts our national finances: namely (forgive me if I have said this before) that healthcare costs and transfer payments have been rising inexorably faster than economic growth over a log period.
At least Mr Hammond did open the possibility that the “triple lock”[ii] – by means of which old age pensioners have been cossetted while students were squeezed – might be reviewed. The problem with the Tories, of course, is that they are electorally dependent on the Lumpenproletariat of over-65s – they who bother to read newspapers and go to polling stations. The young, bless them, just hang out on Facebook.
I’m afraid that your benefits payments could be discontinued, Mr Hammond
The UK government will spend £119.8 billion on benefits this year – that is 2.3 percent above the self-imposed welfare “cap” of £115.2 billion introduced by Mr Osborne in 2014. Instead, a new cap is to be set of £126 billion in 2021-22. Mr Hammond said: The Government has no plans to introduce further welfare savings measures in this parliament beyond those already announced. Of course, we do not yet know if the rollout of Universal Credit will be cost-neutral as the government hopes. Personally, I expect that the new “cap” will be breached just like the last.
Do you need to speak to the Manager, Mr Hammond?
The real star of yesterday’s show was not the Treasury but the Office of Budget Responsibility (OBR) which Mr Osbourne inaugurated in order to prevent the partisan Brownian manipulation of the ONS. In the days of Chancellor Brown, fiscal initiatives would be justified by pre-manufactured economic statistics. George Osborne thought that a body offering independent authentication of economic “facts” would bring more discipline to financial policymaking.
But a post-Brexit OBR, chock full of angry Remainiacs, is bound to feel a bit chippy. And, lo and behold, before Mr Hammond had time to get back to the Job Centre for his weekly interview, they were on the warpath, talking down the British economy with gusto.
The OBR published an economic forecast based on a series of highly pessimistic assumptions.
Basically, the OBR published an economic forecast based on a series of highly pessimistic assumptions (described as ludicrous by Jacob Rees-Mogg MP). They are assuming that Sterling will remain at current low levels against the Euro, thus precipitating inflation; that Brexit will cost the UK economy £60 billion a year as a result of loss of access to the single market; that immigration from Europe will plummet (unlikely in my view since it is currently accelerating); and that the 2017 growth will be 1.4 percent, not 2.2 percent as previously forecast. The kindest thing we could say about these assumptions – especially given the OBR track record since the referendum – is that they are questionable.
Yet if you dig deeper into the OBR statistics there are some unexpected flashes of optimism. During the referendum campaign, Mr Osbourne predicted that Brexit would cost us 500,000 jobs. Now the OBR anticipates 500,000 more jobs in the UK economy by 2021. One wonders if it is really worth the effort to read the 73 pages of statistical gloop. Time would be better spent down the betting shop.
What about the deficit and prospectively rising levels of government debt? I recently predicted that the UK debt-to-GDP ratio would hit 90 percent before the end of this Parliament – and this is now officially forecast with a total debt burden of nearly £2 trillion in sight. However, Mr Hammond knows that, nearly a decade after the beginning of the Credit Crunch, the markets have become desensitised to rising debt levels – money is dirt cheap and the gilt market cash machine never fails to work.
Of course, if ever there came a point where interest rates were to rise to historically “normal” levels, then interest costs on the national debt would explode with catastrophic results. But the financial markets seem to believe in the new normal: that interest rates will now stay low forever. Whether that belief is justified is the overwhelming question of our time.
Thus Mr Hammond has been permitted to abandon the Promised Land of a balanced budget – and instead offers his tribe the prospect of an indefinite period in the fiscal wilderness.
Never been near a bloody “mouse” in m’ life, pet…
As one of Mr Hammond’s Community Advisors I have been vigorously trying to encourage him to unleash the power of the digital economy. This country has deep-seated advantages in the exploitation of digital technology to revolutionise the delivery of public services, not least in healthcare. But, sadly, he just exhibits displacement activity.
We could, with imagination and leadership, slash the cost of the NHS and deliver much better health outcomes if we just gave all who want it free revolutionary health apps which they could download onto their smartphones. Smartphones can be programmed to do anything from taking your blood pressure to administering an electrocardiogram (and then beaming that information to Big Doctor). Right now, we are not even allowed to communicate with our GPs by email and the NHS has shown no interest in robot doctors. In fact, Mr Hammond had nothing to say about the NHS whatsoever yesterday, despite the fact that it accounts for nearly a quarter of state expenditure. I find that strange.
Sorry but the Food Bank is not available to you, Mr Hammond
Mr Hammond explained that the expected increase in government debt was due to three reasons. The first was the reduced growth forecast for growth next year. The second was that tax receipts have been lower than expected this year. The third was that certain monetary operations by the Bank of England have created short-term government liabilities.
Our tax (and benefits) system has still not caught up with the gig economy.
Now I was very interested by the second of these. Mr Hammond explained that one main reason why tax receipts were below expectations was due to the structural effect of rapidly rising incorporation and self-employment which further erodes revenues. What I take from this is that our tax (and benefits) system has still not caught up with the gig economy – the army of dog-walkers, personal trainers and mobile masseurs – and the legion of solo consultants working from home. Mr Hammond said in a reply to a question from Douglas Carswell MP: This is an issue we shall have to address.
We are caught in the cogs of bigger wheels, Mr Hammond
Politicians generally, and finance ministers in particular, should avoid the temptation to think that it is they who make the weather. As the old British hikers proverb goes: There is no such thing as bad weather, only inadequate clothing. The Eurozone might begin to implode in ten days’ time when the Italian people have their Trump-Brexit moment. On the other hand, it might limp on for years. Brexit may turn out to be a smooth passage; or it could turn out to be a protracted, ill-tempered mess… All Mr Hammond can do is to, as it were, don another layer of Gore-Tex.
Mr Hammond knows that there are only two ways out of a worsening debt problem. The first is to slash expenditure – which, it is now clear, is politically impossible. The second is to grow the economy. To get back to the UK’s long-term trend rate of growth of 2.4 percent, we have to boost our productivity. Whether spending £23 billion on infrastructure will achieve that remains to be seen.
Expect more social realism, hereon in…
I am sure that we all aspire to live in a society where a 60-year-old Oxford-educated former accountant is treated with dignity – even if some of his life choices may have been less than sage. It is said that John McDonnell, the Shadow Chancellor (he of Mao’s Little Red Book) recently ordered the Labour Shadow Cabinet to attend a screening of Ken Loach’s gutty Cannes Palme d’Or winning film, I, Daniel Blake. Apparently, nobody turned up.
Maybe Mr Loach’s next film will be the heart-breaking story of a former Prime Minister, yearning to re-enter politics in a nation that reviles him, who is cruelly patronised by an odious bearded billionaire on a Caribbean island. My Name is Tony?
As for Mr Osborne – he was recently asked why he has not resigned as an MP, like David Cameron. He replied: I don’t know where the story ends. And we don’t know either.
[i] Possibly excepting Alastair Darling, Chancellor 2007-10.
[ii] This was Mr Osborne’s pledge that the State Retirement Pension would rise each year by at least average earnings, the CPI or 2.5 percent – whichever was the highest.