WHILE he might be striking a more confident pose these days, Chancellor Philip Hammond surely faces an unappetising set of economic challenges as he prepares to deliver his first Budget next week.
He is unlikely to tell you so. Rather, he is likely to try to make the best of what is, when all is said and done, a miserable economic track record for the Conservatives since they came to power in 2010.
It is worth reflecting for a moment on that track record from a Government that promised “a Britain carried aloft by the march of the makers”.
The Conservatives delivered massive corporation tax cuts with the aim of somehow unleashing the private sector and boosting investment. Yet, over the seven-year period from 2010 to 2016, inclusive, above-trend growth was achieved in only one year: 3.1 per cent expansion in 2014.
In five of the other six years, growth was below two per cent. In 2011, growth was only 1.5 per cent and 2012 expansion was a mere 1.3 per cent.
In 2015, growth came in at 2.2 per cent, well adrift of a long-term average annual rate that has been put by Bank of England Governor Mark Carney at about 2.75 per cent. And UK growth in 2016 was revised down last week by the Office for National Statistics from two per cent to 1.8 per cent.
What the gross domestic product growth numbers highlight is the Conservatives’ consistent inability to deliver decent growth.
They also underline the failure of the Conservatives to implement anything even approaching the right economic policy mix.
In many ways, the Conservatives did quite the opposite of what you should be doing if you want to stimulate an economy in the wake of a shock such as the global financial crisis, which ushered in the deep 2008/09 recession.
Those that paid the price for the damage to the UK economy and public finances from the actions of high-fliers in the global financial sector were, in terms of the policies implemented by the Conservatives, those who could least afford it. And the policies put in place by the Conservatives have ensured these people continue to suffer.
One key policy that continues to hammer those on lower incomes was the decision by the Conservatives to hike the rate of value-added tax to 20 per cent. Rises in VAT hit disproportionately those who have to spend all of their income, or the vast bulk of it, to live. We have also seen savage cuts in welfare provision, which have heaped misery on to the poorest and most vulnerable.
As well as being detrimental from the viewpoint of fairness in society, both of these measures suck demand straight out of the economy and bear down on growth. This is a matter of simple arithmetic.
It was interesting to see the Institute for Fiscal Studies’ 2017 “Green Budget” last month, in which the IFS noted that the UK tax burden was set to rise as a share of national income to its highest level since 1986/87. This point is expected to be reached by 2019/20.
And the IFS’s analysis of tax “takeaways” and “giveaways” under the Conservatives makes very interesting reading.
The Tories’ VAT hike is estimated to represent a “takeaway” of £14 billion in the 2016/17 fiscal year. The cut in corporation tax rates is, in contrast, expected to result in a £7bn “giveaway” in the fiscal year ending this month.
Unfortunately, as shown by the miserable UK growth figures since 2010, the huge corporation tax cuts implemented by the Conservatives, at a time of grim austerity for most, have failed to unleash private sector expansion or fuel business investment.
Rather, business investment has consistently disappointed, and this was the case even before last June’s Brexit vote dealt a significant blow to confidence and made matters much worse. A one per cent quarter-on-quarter fall in UK business investment in the three months to December was viewed by economists as a clear signal that companies were reining in capital expenditure further amid the Brexit uncertainty.
A key problem for Mr Hammond is that UK consumers, who have by continuing to spend played a big part in fuelling the unimpressive growth there has been, are facing further exhausting headwinds this year as consumer prices inflation surges.
Again, the jump in inflation is fairly simple arithmetic. The pound is worth much less than it was in the wake of the Brexit vote – reflecting the UK’s reduced economic prospects. Imports have become more expensive, and this is feeding through to prices.
Annual UK consumer prices index inflation had by January surged to 1.8 per cent, from 0.3 per cent last May ahead of the Brexit vote. It is expected to climb towards, or perhaps above, three per cent as this year progresses.
The economically obvious thing for a Chancellor to do in such circumstances would be to cut consumers some slack. However, poor economic stewardship since 2010 means the public finances are in much worse shape than we were told they would be by this time.
While the European Union referendum result has exacerbated the situation moving forward, key targets on the public finances were missed even before the Brexit vote.
The Conservatives’ obsession with cutting in all the wrong places, stretching public services to and beyond the limit, rather than focusing on what might actually bolster growth, is a key factor in the Tories’ failure to deliver on the public finances.
Then again, even setting aside constrained public finances, you would hardly expect a Conservative Government to deliver a VAT cut.
Sadly, it also seems unlikely that Mr Hammond will back off from the additional £12bn of annual welfare cuts planned by the Conservatives.
The Resolution Foundation, which recently predicted the biggest rise in inequality since the Thatcher years of the late 1980s between this fiscal year and 2020/21, underlined the impact of inflation and the swingeing working-age welfare cuts.
The Conservatives might be trying to bang the populist drum in the wake of the Brexit vote, as we brace ourselves for a protracted period of uncertainty with the triggering of Article 50.
However, it is difficult to imagine Mr Hammond delivering much for ordinary people in next week’s Budget. Or, by extension, for an economy that desperately needs bolstered.
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