The hard work has been done, so we are assured. The end of austerity is in sight, so the Prime Minister insists. All we need now is a Budget to prove it. And a Budget opportunity is less than three weeks away.
By any measure we could reasonably look forward to an easing of public spending constraints, a big boost to infrastructure spending, an overhaul of business rates, measures to increase business investment and a cut in personal taxes to help households and consumer spending. After all, has not the UK budget deficit, the ratio that had us in thrall when it rose above the Maastricht Treaty limit of three per cent of GDP, now fallen to £39.9 billion or two per cent of GDP? And the decline has continued: borrowing in the year to date, at £17.8 billion, is running £7.8 billion less than in the same period of 2017.
As for the totality of government debt, this stood at £1.78 trillion at the end of August, still a ferociously high figure, but down £28.7 billion or three percentage points on the figure for August last year.
Until now, I have been against anything that smacked of a giveaway budget. But I am minded to change this view. This is not because I believe the assertions that it is “job done”, but that circumstances are changing – and not for the better.
The economy is showing signs of stalling, putting at risk even the feeble growth for the past few years. And the developed world as a whole is now at a tipping point, with a global slowdown in trade and output now a real possibility.
In that event, the balance of fiscal policy should tip towards expansion, with higher government spending helping to offset a downturn that could bring an end to years of falling unemployment and a further squeezing of household incomes.
But in Mr Hammond we have a naturally cautious Chancellor. And that caution is mightily reinforced by the deep uncertainties immediately pressing on Brexit. Who dares risk a departure from Treasury orthodoxy at this point when a ‘no deal’ outcome could deal a savage blow to business and household confidence?
However, there is a greater risk that an economic slowdown, already evident, could tip into recession. The combination of a sharply rising oil price – now grazing $85 a barrel, up by 20 per cent since mid-August and by 50 per cent since this time last year – and the prospect of higher interest rates poses a significant threat.
Yesterday the Office for National Statistics unveiled figures showing that buoyant activity in the summer, with the three-month growth in GDP running at 0.7 per cent, is now drawing to a close, with no growth whatever in August.
Earlier this week, survey evidence pointed to the weakest rate of expansion for five months in Scotland’s private sector. While the Royal Bank of Scotland’s latest Purchasing Managers Index pointed to “solid” growth among service providers last month, manufacturers reported a slight drop in production levels. Survey respondents attributed the easing of growth to a weaker rise in new business.
Nor was cheer to be found in the latest British Chambers of Commerce (BCC) survey. This found the UK economy to be “stuck in a rut” because of uncertainty over Brexit and weaker confidence. It found that firms in the services sector, which represents 76 per cent of UK GDP, had “given up” hiring staff, with the percentage of service companies attempting to recruit new staff at its lowest for 25 years, and that manufacturing industry had seen exports slow.
Said BCC director general Adam Marshall: “We are stuck in limbo while Brexit negotiations rumble on.” Uncertainty over future trading conditions is constraining investment in both services and manufacturing firms.
So why wait for growth to turn negative before acting? There is much that now needs to be done, regardless of any Brexit outcome, to head off recession risk and make the economy more competitive. An early start could be made by cutting business rates before an investment freeze really takes hold and our high streets are further denuded. The rates burden has so far been largely oblivious to the carnage wrought on physical retailers by the relentless march of online trading.
In addition, a further cut in Corporation Tax would do much to mitigate the investment paralysis caused by Brexit uncertainty. While there is much to recoil over the Donald Trump presidency, his tax cuts have brought an economic surge in the US with growth nudging four per cent.
A similar tax-cutting programme here with Corporation Tax brought down to ten per cent would make the UK one of the most attractive economies in the world for business investment and expansion. At the same time, personal tax rates – both the higher rates and the standard rate – could be trimmed, helping household confidence through the Brexit morass. To delay would be to allow the forces of despair and atrophy to take hold, making a delayed and reactive Budget boost with much harder work to do. “Wait till we know the outcome” is the common refrain.
But the final outcome could take at least two years to emerge. So complex have the Brexit negotiations become that some are already comparing it to the Schleswig-Holstein Question – a dispute so interminable that Britain’s Foreign Secretary Lord Palmerston was heard to complain that only three people understood it: one died, one went mad and the third had forgotten. It took 18 years, two uprisings and two plebiscites before a settlement of sorts was achieved.
We should not have to go mad or die before taking appropriate action to save the economy from unnecessary pain. However, for this cautious Chancellor, one course of action may appeal to him: he could opt for a standstill package and promise to unveil a Budget in the new year. A spring Budget? How absolutely novel – a Treasury masterstroke of bold and innovative thinking! Now why on Earth has no-one ever thought of it before?