Hammond’s plan to get Britain out of a post-Brexit jam

Yesterday’s Autumn Statement was the first real glimpse of the government’s plans for post-Brexit Britain and the latest insight into Theresa May’s programme to establish a political legacy that is not dominated by the UK’s exit from the EU.  It was an Autumn Statement that sought to balance the Prime Minister’s determination to double down investment in the political centre ground, against her Chancellor’s hawkish fiscal prudence in the face of economic uncertainty caused by Brexit. And it was an Autumn Statement that offered an olive branch, albeit conditional, to corporate Britain and beyond.

For the former Chancellor of the Exchequer, George Osborne, his bi-annual set piece interventions from the Commons despatch box were an opportunity to put on a political fireworks display, with his trademark ‘rabbit out the hat’ crescendo and carefully scripted puns, put-downs and parody adding theatre to proceedings that were always more about burnishing Osborne’s credentials as a shrewd political operator, than as a credible economist. How different, then, was the current Chancellor, Philip Hammond’s performance. Measured and dry by comparison; ever the vision of the prudent, grey-haired middle England accountant, radically contrasted with his predecessor, the political incarnate of the so-called Notting Hill set that has been ousted by May.

Hammond was all too aware that this was an Autumn Statement that would need to protect the government from whisperings of backbench mutiny over the nature of Brexit and maintain moral support for a government with a relatively slim majority in the Commons. Brexiteers – of which there are many in the Conservative Party – have long grumbled that prudence, restraint and solemnity from the Treasury and Bank of England are self-fulfilling and dampening Britain’s chances of emerging as a great international investment powerhouse; and that opting for a ‘soft’ Brexit, remaining in the Single Market for example, would represent an affront to the British people.

This Autumn Statement therefore required a carefully calculated political balancing act. Firstly, remaining clear on the realities of a post-Brexit UK, whilst retaining the confidence and propping up the hopes of the 51.9% of the country that voted for Brexit in June; secondly, exercising fiscal caution, tempered with optimism on the potential economic impact of a revived industrial strategy designed to boost growth outside of London; and finally, offering a boon to investors and job hunters with an infrastructure-backed stimulus package, whilst keeping a prudent eye on the balance sheet.

The result is an Autumn Statement that is focused on fostering traditional, small ‘c’ conservative resilience: a resilient economy designed to withstand the economic unknowns of Brexit and what the Chancellor referred to over the weekend as an “eye-watering” deficit; and resilient households, able to absorb the shock of increased inflation driven by a depreciating pound.

Jam tomorrow

The political narrative underlying yesterday’s intervention is framed in the context of a new philosophy that is being driven with ideological fervour from Number 10.

Theresa May’s vision for a “stronger, fairer Britain” is born of a calculated study of the voting behaviour of a quiet and shy proportion of the electorate that confounded the pollsters and ‘liberal elites’ from the voting booth in June. It also represents a sharp change in tack to capitalise on the political landscape that contributed to the ascendency of President-Elect Donald Trump, and the emergence of a wave of political populism that is sweeping across the world’s developed economies. May’s appeal to what she calls “ordinary working class families” – the latest but more deliberately worded iteration of Cameron’s ‘hardworking’ families – or those families “just about managing” (now dubbed “Jams” by commentators), was first set out at October’s Conservative Party Conference. In the Autumn Statement, we now see the economics of this worldview coming into play.

The hope is that investment in means to improve the lot of “Jams” will pay out political dividends in 2020. The decision to retain Osborne’s commitment to raise the higher rate of tax threshold from £45,000 next year to £50,000 by 2020 is an appeal to both the traditional Tory base and aspirational working class families primed for a shift from their historic Labour voting bias. The freeze in fuel duty and cuts to air passenger duty, which is intended to offset the increase in the cost of package holidays, caused by falling value of the pound, are in a similar vein. The moves to build 40,000 affordable homes, moderate the blow of cuts to universal credit and ban letting agents’ fees – a policy stolen from the Labour manifesto – also seek to build political capital with swing voters and soften the Tory brand. The politics at play are clear: even the “Jam” moniker seeks to steal ground on former Labour leader Ed Miliband’s “squeezed middle”; it is brazen in its attempt to shift Labour further to the left and confine its leader, Jeremy Corbyn, to an outmoded critique on austerity and unfunded promises on welfare and infrastructure spending.

By contrast, Hammond’s own infrastructure plan was modest and focused on small-scale infrastructure projects that stimulate short-term job creation and long-term productivity, particularly roads and rail; and a new £23 billion “national productivity investment fund”, which will seek to boost output over the next five years. Funding is likely to be prioritised in the regions, away from the London-centric HS2 and Crossrail – supporting a wider, diversified industrial strategy that respectfully nods to Osborne’s Northern Powerhouse.

May means business

Most closely watched by investors betting on the fall and rise of the FTSE and pound were Hammond’s utterances on the plight of British business in a brave new world. Since her maiden speech as Prime Minister on the threshold of Number 10, May has promised a hard-nosed shake-up of corporate Britain; “we are coming after you,” she warned corporation tax avoiders, at the Conservative Party Conference. May has sought to frame the referendum vote as a warning shot to boardroom elites that are alleged to have sheltered the gains of economic growth from redistribution and, in her words, “gamed the system”. Certain business leaders and investors have been painted as pantomime villains in an effort to side with an anti-establishment populist mood. So as to right the economic wrongs that she believes have been caused by nefarious corporate practices, May has repeatedly called for a new social contract between business and society, which has caused murmurs of discontent from business leaders fearful of too much meddling in boardroom matters and the markets. May’s interventionist streak has been tempered by moves to dilute plans to force companies to place worker representatives on boards – much to the chagrin of the trades unions. But the Prime Minister revealed further details on the nature of this social contract on Monday when, in a speech to the CBI, May stated that the UK will create the “best corporate governance environment in the G20”. Further detail on this framework is yet to come; but initiatives to increase transparency and open business up to external scrutiny, such as the publication of executive-to-worker pay ratios, are likely.

Set against this backdrop, the Autumn Statement was by no means a business bashing one. The main statement of intent for post-Brexit Britain came in the form of a commitment to uphold the reduction of corporation tax to 17% by 2020, so as to boost the UK’s attractiveness as a place to do business. There remains speculation that Theresa May will seek to lower the tax rate further in the event that Donald Trump follows through on his campaign promise to cut US corporation tax to 15%. The Chancellor committed £400m to the British Business Bank to invest in growing innovative firms; and to doubling UK export funding capacity to make it easier for British businesses to trade abroad. Moves to improve the UK’s credentials in technology and innovation, through an Industrial Strategy Challenge Fund aimed at supporting R&D and funding for robotics, AI and biotech, represent a further boost for regions outside of London, where the majority of the UK’s R&D takes place. This is an attempt to add clout to May and Hammond’s efforts to rebalance the economy away from London’s financial centre. Critics will argue that even with these commitments, the industrial strategy, when it is published, will be too narrow in its remit – seeking to curry favour by protecting traditional blue-collar jobs in construction, manufacturing and industry, rather than genuinely future-proofing the UK economy. From the evidence before us, the government’s approach is relatively short-termist: to paraphrase, “let’s get through Brexit, keep unemployment rates down and boost productivity”. Whether May will genuinely re-evaluate her tendencies towards support for traditional industries remains to be seen.

Elephants (and rabbits) in the room

Investors will remain concerned that questions over the nature of Brexit remain unanswered – particularly given that the Office for Budget Responsibility (OBR), the UK government’s economic watchdog, expects that Brexit-related borrowing will increase by £58.7bn over six years. Curiously, the OBR’s report, setting out the projected health of the UK economy, noted that when the watchdog asked Number 10 for further detail on Brexit, it was pointed to two speeches given by Theresa May, and nothing more. It is of importance, however, that the OBR’s central forecast is based on the assumptions that the UK will leave the EU in April 2019; that the negotiation of new trading arrangements with the EU and others slows the pace of import and export growth for the next ten years; and that the UK adopts a tighter migration policy, but (crucially) not so tight as to reduce net inward migration to the government’s desired target of “tens of thousands”.

If Hammond did have a ‘rabbit’ for the press gallery and backbenches, it was only that he would scrap the Chancellor’s twice-yearly set-piece intervention, instead limiting budgetary announcements to one Autumn budget and one simple response to the OBR’s economic forecast in the Spring (although Hammond has reserved the right to make interventions if recommended by the watchdog). In short, as Hammond put it, he will refrain from making changes “for the sake of it” – a rap on the knuckles for previous Chancellors’ politicking with the economy.

Hammond is jokingly referred to by his Cabinet colleagues as “spreadsheet Phil”. This Autumn Statement was evidence of that. While the Chancellor did allow himself the odd wry smile and occasional in-joke, his address was focused in the first instance on detail rather than drama. In spite of the giveaways, significant questions remain, however. Notably – the hard facts on the UK’s Brexit negotiating stance; how the government will balance the books post-Brexit; and what the early signs of May’s predilection towards intervention in markets will really mean for business. Do not expect any detail on the first two any time soon; May will stick to her guns and doggedly refuse to give a “running commentary” on Brexit, which she has shunned to date. But it is likely that we will get the first signs of the government’s true colours on its handling of the business community – particularly those sectors most closely exposed to consumers – when announcements on the regulation of the retail energy market are made in the coming months. The nature of that intervention will set the tone for the remainder of May’s first term in Number 10 and should be closely watched.

In the interim: hold onto your hats; 2017 is going to be the start of a rather bumpy political ride.