Budget 2017: Hammond masks gloomy outlook with stamp duty cut

Philip Hammond placed a stamp duty cut for first-time buyers at the heart of his budget on Wednesday as he sought to mask Britain’s deteriorating economic prospects by pledging to “revive the homeowning dream”.

Faced with evidence showing that the UK will be one of the weakest growing major economies in the next five years, the chancellor announced a modest increase in funding for the NHS, and announced £15bn of measures to tackle the housing crisis.

The budget measures, while welcomed by Conservative MPs, were overshadowed by new forecasts by the independent Office for Budget Responsibility that cut the rate at which Britain is expected to grow in the years up until 2022 by a quarter. The OBR is now more pessimistic about the UK’s growth prospects than the Bank of England and the IMF.

In its biggest downgrade since its creation seven years ago, the OBR said earnings and living standards would be squeezed hard over the next two years, even if the government succeeds in striking a Brexit deal with other EU member states.

Unemployment is expected to creep up as a result of sluggish growth – cut from 2% to 1.5% in 2017 and by between 0.2 and 0.5 percentage points in the next four years.

Hammond announced a £9bn boost to borrowing in 2019-20 – expected by the Treasury to be the toughest period for the economy as Britain leaves the EU – and pushed back until the mid-2020s the date by which the government expects to eradicate its budget deficit.

In what he called a “balanced” statement, the chancellor sought to placate rebels on both wings of his party, setting aside £3bn for Whitehall departments to prepare for Brexit, and cutting waiting times for claimants of universal credit.

Hammond had been under intense pressure to respond to the concerns expressed by voters during the general election campaign about cuts to public services and the rising cost of living, with several vocal MPs, including former minister Nick Boles, calling for an end to austerity.

Eurosceptic MPs welcomed the extra funding for Brexit preparations. Chesham and Amersham MP Cheryl Gillan said: “I would particularly like to welcome some changes, for example the additional money that has come in for the Brexit preparations. That is a major change for this country.”

The chancellor said his approach would help Britain “resolve to look forwards, not backwards” and insisted the economy “continues to confound those who seek to talk it down”. He admitted that talks over Britain’s future relationship with the EU were at a “critical phase” and said the government was prepared for any outcome. The OBR said it could not forecast the full impact of leaving the European Union because it was not yet clear what outcome the government would achieve.

The shadow chancellor, John McDonnell, condemned the statement as “a nothing-has-changed budget from an out-of-touch government with no idea of the reality of people’s lives and no plan to improve them”.

Hammond’s upbeat tone contrasted with a bleak assessment from the OBR, which has said it could no longer ignore the prolonged period of weak productivity growth since the start of the global financial crisis a decade ago. In a sign of the permanent damage caused by the worst recession the UK has suffered since the second world war, the OBR said the trend rate of productivity growth was now around 1%, half its pre-crisis rate.

The Office for Budget Responsibility is the government’s independent forecaster, which gives its verdict on the outlook for growth and the public finances twice a year.

The forecasts are published to coincide with the chancellor’s two big set pieces of the year – the autumn budget and the spring statement – and takes into account the impact of any tax and spending measures announced in those statements.

The OBR also uses its public finances forecasts to judge the Treasury’s performance against the chancellor’s fiscal targets, stating whether or not it has a greater than 50% chance of hitting the targets under current policy.

It was established in 2010 by the then chancellor George Osborne with the aim of improving the credibility of the government’s official forecasts for growth. The forecasts were previously produced by the Treasury itself and often criticised for being unrealistic.

The OBR is led by three members of the budget responsibility committee, including chairman Robert Chote, a former director of the Institute for Fiscal Studies, with support from the OBR’s permanent staff of 27 civil servants.

Analysis by the Resolution Foundation suggested the downgrade to GDP growth forecasts would result in a £1,000-a-year cut to the average family’s income, with average pay not recovering to pre-crash levels until 2023. The TUC said wages were now set to be worth £800 less a year in 2021 than had been expected at the budget in March.

Against this gloomy backdrop, the chancellor chose to loosen the purse strings, spending £25bn more over the next five years than he had planned at his first budget in March. Treasury insiders acknowledged that the spending boost in the next two years was to help offset the looming downturn.

The abolition of stamp duty for first-time buyers was the most eye-catching element of Hammond’s bid to fulfil what Theresa May has called her “personal mission” to fix the housing crisis, and build 300,000 new homes a year.

The Treasury said it amounted to an average tax cut of £1,600 for a million first-time buyers over the next five years. But the wisdom of the measure was quickly called into question by the OBR, which said it would push up house prices.

Other housing measures included allowing local authorities to levy increased council tax on empty homes, setting aside more funding for local authorities to buy up and decontaminate sites, and a review led by former minister Oliver Letwin into how to prevent developers hoarding land without building on it.

But the details of the budget red book show that aside from the stamp duty change, the housing measures amount to just £275m of new spending in 2018-19, and £1.6bn by 2021-22.

Alongside housing, Hammond announced an extra £2.8bn for the NHS, including £350m to deal with increased pressures over the winter and to get waiting time targets back on track.

“Our NHS is one of our great institutions. Its values are the values of the British people, and we will always back it,” Hammond said.

But health service bosses said the funding fell well short of what was needed, and suggested they would be forced to make difficult decisions.

The chair of NHS England, Malcolm Grant, said: “The extra money the chancellor has found for the NHS is welcome and will go some way towards filling the widely accepted funding gap. However, we can no longer avoid the difficult debate about what it is possible to deliver for patients with the money available.”

As expected, the chancellor also caved in to intense pressure from Conservative backbenchers and abolished the one-week waiting time before universal credit claims can be processed – a move that should cut the waiting time from six weeks to five.

He also said claimants would be given a year, instead of six months, to pay back the advances they can receive to make ends meet while they are waiting to receive their funds. In total, the changes will cost £1.5bn – but will not unpick the significant cuts to the system made by George Osborne, much of which are still to come.

Hammond was keen to avoid taking risks, after his March statement unravelled within days as a backbench rebellion sunk his plan to increase national insurance contributions for the self-employed. He avoided repeating that mistake by rejecting a recommendation to slash the VAT threshold for small businesses.

The budget included a series of anti tax-avoidance measures, after the leaked Paradise Papers underlined the scale of the challenge.

The chancellor closed an obscure loophole that had allowed foreign owners of commercial property to escape tax on sale, a change long campaigned for by the Labour MP Stella Creasy, and predicted to raise £470m in this parliament.