Bill Jamieson: Why the Chancellor should boldly do nothing

Philip Hammond should fill his ears with wax to avoid numerous pleas for a spending spree, writes Bill Jamieson.

Chancellor Philip Hammond has choices to make ahead of his Autumn Statement. Picture: AFP/Getty

Ahead of his Budget next Wednesday, pressure has mounted on him to come to the rescue with bold new announcements to help lift the grim mood that now grips the government and the country.

Spending lobbies are in full cry urging higher spending, the NHS is to the fore. Welfare services, local councils, housebuilders and the defence lobby are close behind.

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Hammond is badgered on all sides to ease up on austerity, lift the public sector pay cap, pump more money into vital services, cut beer duty, cut whisky duty, give first-time house buyers a break – oh, and above all, pump in billions to a major housebuilding programme.

How can he resist? After all, isn’t the economy in need of a boost? The Scottish Retail Consortium (SRC) figures this week were miserable: sales down one per cent compared to October last year while non-food sales have slumped 5.2 per cent – the lowest since January 2012.

Even adding in online sales – all those millions of Amazon parcels – total non-food sales were still down 4.4 per cent. Retail therapy? Retail depression, more like.

So my advice to him this morning? Still those twitching fingers! Fill your ears with wax! Stuff your mouth with muffling wool! Do nothing. Or do as little as possible. We are in no condition to “give away” billions. One look at this government’s finances would tell you we still have a massive and growing debt pile. As for contingencies, Mr Hammond has a paltry pile of powder and he needs to keep it dry.

Now to be seen “doing nothing” may be regarded as the worst political option. But seldom is a government more bombarded with bad – and often utterly ruinous – advice than in the approach to a major financial statement.

Take the urgings of the Office of Tax Simplification to change the VAT system “awash with layers of complexity”. Among 23 suggestions is a blockbuster proposal to drastically lower the turnover threshold for paying 20 per cent VAT from its current level of £85,000 to one nearer £26,000. This would have the added benefit (sic) of bringing us “closer to the European average” and would raise between £1 billion and £1.5bn for the ever-hungry Treasury.

But this maverick advice would hit half a million small firms and the self-employed and would be a major disincentive to start a business. And this matters to Scotland because there are 365,600 private sector businesses operating in Scotland. As the Federation of Small Businesses points out, SMEs continue to account for 99 per cent of all Scottish businesses, and provide 55 per cent of Scotland’s private sector jobs.

Unlikely, surely? But the problem is that Mr Hammond has form. He was forced to withdraw his budget proposal to raise self-employed National Insurance contributions after an outcry from his own backbenchers.

If the chancellor must meddle, he would do better raising the VAT threshold to £120,000 as a spur to small business growth and enterprise. A similar VAT simplification would surely be in order for the housing sector. He is pressed to spend billions on a housebuilding spree. Setting aside the substantial additional costs in schools, amenities and transport infrastructure, there is the loss of yet more farming land and the settled cohesion of existing communities.

Better, surely, and far less costly, would be to extend the zero rate of VAT currently enjoyed on new builds to existing property renovation and improvement. This would avoid the expense of extra amenity help and revive existing town centres.

What of household finances and the beleaguered retail sector? Below inflation income growth has undoubtedly been a factor. But this, to some extent, has been offset by employment growth in Scotland – up over the year to a record 2.6 million or 75.2 per cent, pipping the UK average (75 per cent). Unemployment at four per cent is also lower than the UK average (4.3 per cent).

Household spending overall is more robust than retail data suggests. Since the economic downturn in 2008-09, household spending has grown by 14 per cent in volume terms, or by just over a third in current prices. The lower volume increase reflects the impact of inflation – and much of that has been evident in the cost of other non-retail household spending such as utility bills and charges and subscriptions to services such as Sky and Netflix.

‘Down’ factors of late include unseasonably mild weather in October, coupled with limited promotional activity and shoppers deferring spending in the hope of ‘Black Friday’ bargains with November 24 now the biggest shopping day of the year.

Ewan MacDonald-Russell, head of the SRC’s policy and external affairs, says: “We’re also seeing consumers spending more on experiences such as holidays and also on longer term spending plans (cars, mobile phones, television subscriptions) which is spend which could previously have gone on high street spending. When that’s combined with quite fragile consumer confidence, and of course increased grocery bills, it all adds up to a pretty dreich month.”

Even so, would not a tax cut or a rise in personal allowance help? There is a limit, on social solidarity considerations, to the percentage of the population that is exempt from tax. As many as possible should pay something, however modest, to contribute to public services. To shield millions from paying any tax only fosters the illusion that public services are somehow free or costless or do not involve an opportunity cost – a trap into which the Scottish government has all too often fallen.

Finally, warning signs have been mounting that we could be close to a sharp reversal in financial markets. The government needs to keep its own spending commitments under control and have something in its defensive armoury should there be a credit crunch.

The paramount need is to continue to bring government borrowing down and stop adding to a debt pile already standing at £1.8 trillion and forecast to hit 88 per cent of GDP. With many commentators warning of a setback in financial markets and a potential credit crunch, this government is in a dangerously weak position.

Meanwhile debt interest this year is forecast to hit £45bn. When will the truth hit home that more borrowing is not costless money but adds to the revenue drain in future years? Hence my plea to the chancellor: Do nothing, or do as little as you can get away with. Sit on those hands. Dissemble, prevaricate, mumble or whistle. Did he not say at the outset he would have one budget a year, not two, and it would be in spring?

Sometimes, Mr Chancellor, the old tunes are the best.