He was regarded as a safe pair of hands when he entered Her Majesty’s Treasury. He was “spreadsheet Phil”. Indeed, even in his last budget in March, the Chancellor acknowledged his own dryness; “I have a reputation to defend,” he joked to the House of Commons. But now, after his botched National Insurance plans and his bleak outlook on Brexit, some have said he should be “tried for treason”.
The sharp change in the perception of Philip Hammond may force him to become more adventurous with his autumn budget than he would prefer. According to forecasts by the Office for Budget Responsibility, the government’s fiscal watchdog, the £26 billion which Hammond had put aside as a buffer against Brexit may be all but gone. Combined with growing demands for more public spending and increased investment, for example in housing, the certainly Chancellor faces a tough test later this November.
Last year, while sensibly ditching his predecessor’s plans to run a budget surplus by 2019-20, the Chancellor replaced it with targets of his own; to reduce public borrowing to less than 2% of national income and eliminate all borrowing by the mid-2020s. But, even as Hammond tries to distance himself from George Osborne, he is facing strikingly similar problems.
In all his six years as Chancellor, Osborne never managed to deliver his deficit reduction promises on time. Disappointing economic growth and lower-than-expected tax revenues dampened the effects of his measures to put Britain back in the black. In addition, in his last Autumn budget, his unpopular policy to cut tax credits was ditched.
Despite this, Osborne was still credited, even by economists, for his willingness to soak up the political embarrassment of his U-turns and abandonments. Instead of cutting spending even further to meet his fiscal targets, he simply moved them. In the meantime, he found ways to uphold his idealism, sustaining his commitment to a lower-welfare, lower-tax, higher-wage economy. He talked the talk even when he could not walk the walk.
For Hammond, a similar destiny may await. Certainly, as the Institute for Fiscal Studies points out, Hammond may have to either abandon his targets or ignore the calls for increased public sector spending and investment. The choice is a poisoned chalice. Moreover, the Bank of England’s recent decision to raise interest rates, which will increase the government’s debt interest costs, is also unhelpful. As such, Hammond may have to replicate Osborne’s canny political ducking in order to address this dilemma. Indeed, he may well have to move the goal posts in his autumn budget.
Moving fiscal targets may not be popular, but it may be necessary. More than ever, a realistic approach needs to be taken with the UK’s economy. The uncertainty of Brexit, with the possibility of a ‘no deal’ and implications attached to it, combined with a frail health service, a bloated housing market and dismal productivity growth has meant that difficult decisions need to be made.
But adjusting fiscal targets should not act as a catalyst for unsound public finances. Rather, the Chancellor should maintain the ambition of reducing the deficit but also be adaptable in achieving such a goal. The means should be as sensible as the ends. But to acknowledge this, Hammond must look up from his spreadsheets and exercise the compassionate conservatism which has served the Tories well in the past. He can still do so while drawing a contrast between the Tories and the economic incompetence of Labour, whose policies would place heavy burdens on the state and on future generations.
In essence, with such an approach, Hammond could become ‘Phil the fiscal doctor’; a copper-bottomed Chancellor whose stern politics matches his flexile, empirical approach to economics. A political financier like this would earn the approval of economists, the respect of peers, and possibly the electorate. But such a title must be earned, and in a few weeks time, the Chancellor will have a chance to do just that.