‘Load up the bazooka!” Thus the unlikely order from that least excitable of chancellors, our very own dull grey “Spreadsheet Phil” Hammond. Authoritative reports at the weekend revealed Treasury plans to fire a fusillade of stimulus measures in the event of a Brexit “no deal” breakdown on 29 March.
Resort to such a package echoes the famous $700 billion “bazooka” fired by US Treasury Secretary Hank Paulson in late 2008 at the height of the financial crisis to avert a catastrophic repeat of the Great Depression.
Many feared it would not work and would only deepen the fear and panic that had gripped financial markets. But in due course nerves steadied, bank lending unfroze and the economy pulled out of a nose-dive.
Now, amid fears of a major meltdown as Brexit D-Day approaches with a deal looking as elusive as ever, “secret plans” have been revealed under which the UK will cut taxes and tariffs and loosen the monetary spigots to help avoid a slide into recession.
The plans have been drawn up under the code name “Project After”. They are said to include “a series of aggressive policies including cuts to corporation tax and VAT, along with further tax relief to encourage business investment”.
News of these plans emerged as Bank of England Governor Mark Carney warned last week that a “fog” of confusion had descended on the country amid the failure to agree a Brexit deal with Brussels.
He said the Bank now expects the UK economy to expand by just 1.2 per cent in 2019 – its most sluggish performance since the depths of the recession in 2009 – even if a deal is clinched in the next few weeks. This compares with a growth forecast of 1.7 per cent last November.
It might have helped business and household confidence if such contingency plans had been outlined much earlier: this may have helped to prevent the seizure of business investment that has been a feature of UK economic under-performance for many months.
But according to the Financial Times – no friend at all of Brexit – work on the plans began shortly after the Brexit referendum but have been subsequently widened. The list of policy options is said to have been completed at the end of last year. Another plan, code-named Project Bluebell, is understood to be focused on limiting economic damage to the sectors most exposed to a no-deal Brexit, such as agriculture, car manufacturing and pharmaceuticals.
These “revelations” should not come as too much of a surprise. It was never likely that the Treasury would stand idly by and do nothing in the event of a Brexit meltdown – an assumption on which many of the scariest post-Brexit forecasts have been predicated. Indeed, Hammond himself has previously said that he is prepared to upgrade his spring statement next month into a full Budget and deploy £15bn to help boost the economy.
It’s hardly in the bazooka class of financial retaliation and scarcely bears comparison with the firepower expended by the US in 2008. But that stimulus munitions are being drawn up for the Treasury guns is a reassurance of sorts.
Fiscal conservatives might well ask whether such stimulus is really necessary. UK exports are at an all-time high. We have record low levels of unemployment. Numbers in work are at an all-time high. There are more than 850,000 unfilled vacancies. Real average earnings are on the rise and inflation is down to 2.1 per cent.
A fiscal bazooka does not address the concerns of business organisations such as the Scottish Chambers of Commerce, CBI Scotland and FSB Scotland about trade disruption and delays and the extra paperwork that would be required at borders.
Moreover, government stimulus in these conditions risks a demand explosion with which many companies are ill-equipped to cope.
But government cannot be perceived as simply standing still and doing nothing. It has to be seen to be armed, primed and at the ready. If that is seen to be the case, it may not be necessary that all the stimulus firepower in the form of a public spending boost is deployed, but the appearance of it being marshalled may give a much-needed shot to confidence.
Can the chancellor risk it? Government borrowing in the current financial year at £35.9bn is £13.1bn down on the same period in 2017 and the lowest year-to-date total for 16 years. And it takes the level down to just two per cent of GDP. The more contentious debate centres on which (if any) taxes to cut and which public pending projects to promote.
Many would dispute the wisdom of further cuts in Corporation Tax – already down to 19 per cent and due to fall to 17 per cent by end 2020. HMRC estimates the cost of this further fall to the Treasury in terms of lost revenue at £6.2bn. As we already have one of the lowest corporation tax rates in Europe, is a further cut warranted?
A temporary cut in VAT would certainly help consumers: the 2.5 percentage point cut in 2019 to 17.5 per cent was estimated to have cost the Treasury (or saved business and consumers) £12bn.
As for public spending boosts, many would question the efficacy of grandiose infrastructure projects, while a head of steam is building up in favour of cancellation of the London-Birmingham high-speed rail link. The cost has spiralled from an original estimate of £34bn to £56bn amid leaked Treasury worries that the eventual cost will be more than £100bn.
That is not to say that there are not hundreds of small-scale road and rail improvement schemes worthy of funding support. But public confidence in large, headline-grabbing projects has soured – while simply handing over more money to local government risks resources being leeched away in greater bureaucratic feather-bedding and a new raft of fancy-titled executives, “action tsars” and project overlords on inflated salaries.
It’s less a bazooka we need than a set of targeted, thought through stimulus measures, arguably starting with a radical reduction in business rates and plans to revitalise our town and city centres. As with Brexit – indeed as always – the devil is in the detail. A special place in hell is indeed reserved for those who gloss over it.