If Philip Hammond wants to make a success of the Budget, he needs to get the nation's priorities straight

Editorial
Philip Hammond is due to deliver the 2017 Budget tomorrow: AFP

For all his famously funereal demeanour – and he has a great deal to be funereal about these days – Philip Hammond has a well-developed sense of humour. At the weekend he was almost playfully subverting the usual convention of the pre-Budget photocall with paperwork and the red box, scratching his head with a theatrically quizzical expression on his wizened features. His speeches have contained some well-timed gags, even at his own expense. Still, the dilemmas he and the nation face are no joking matter, and have rarely been more acute in the past half-century or so.

Brexit, of course, permeates every calculation the Chancellor makes. It affects virtually every line of government expenditure and revenue, and thus whatever priorities the nation wishes to set for itself. Brexit itself is a spending line in the Budget, as the Chancellor must prudently set aside a sufficiently large sum to cushion the economy against the “shock” of a hard Brexit (even though it is growing so inevitable that no one would fall off their chair in disbelief if it befell the British in March 2019).

With so much consumer spending and investment on hold during the continuing uncertainty about outcomes, growth is inevitably depressed, as are wages and job creation, no matter how impressive it may appear. Other things being equal, the economy would be larger, living standards higher, and the public finances healthier today if there were no Brexit. That situation is likely to persist, and the Chancellor needs to continue to set aside funds – “headroom” – to deal with any fresh crises as they arise.

More fundamentally, inside or outside the European Union, inside or outside the single market or customs union, the UK needs to improve its woeful productivity record if it is to compete in world markets. This is hardly a new idea, though it seems to have become a more stubborn one since the financial crisis. Gordon Brown was the last Chancellor to make a fuss about it; he was right to do so, but the measures he put in place – a mixture of tax breaks and modest state interventions – made little lasting difference.

Mr Hammond seems set to repeat that misguided approach, with a glimpse into the Government’s long-promised industrial strategy adding some detail to the ambitious but vague talk about artificial intelligence, driverless cars and other modern wonders. The truth about productivity is more prosaic; it is driven above all by investment, and that can only be secured at the cost of consumption. If the British want more jam tomorrow from a radically higher rate of capital formation in the public and private sectors, then they will need to settle for rather less jam today. That is a truth the British seem to be in no mood to accept, and Mr Hammond is unlikely to risk further loss of political support by adding to taxes on spending, for example, to switch resources into research, development and infrastructure. Borrowing is the favoured method of funding, but there are limits to what can be done as debt approaches 100 per cent of GDP. So the productivity problem will endure.

As tight a fiscal straitjacket as Brexit represents, Mr Hammond retains some freedom of movement. He could do much more than he has indicated to ameliorate the housing crisis – few would expect a “solution”. More help for first-time buyers is the usual answer to such pleas – but is disproportionately helpful to those in the (relatively) fortunate position of being able to even contemplate purchasing a property. As the Grenfell fire reminds us, there are many more who will never be in a position to own any kind of home, and it is they who rely on the absurdly shrunken stock of social housing, with all the issues this currently entails.

If budgets are a matter of choosing priorities, then surely this is the priority, within the imperatives of improving British housing. Mr Hammond’s reforms to planning permission and “land banking” by the big housebuilders are welcome, but will not directly help those homeless or close to it.

Targeting help for the low-paid is also something the Chancellor should be realistic about. Given that so many public services staff, especially in the NHS, will be lost as Brexit closes in, the current level of wages is simply unsustainable, economically as well as financially. Even the flintiest chancellor has to recognise that wages cannot be frozen forever in a sector where demand is still growing, thanks to an ageing population.

The young – all too often mislabelled disparagingly as “millennials” – are the ones who are most likely to find themselves in poor, overpriced accommodation and in low-paid work; they are also disadvantaged in many other respects by comparison with their parents’ and grandparents’ generations. From student debt to car insurance to pension provision to skyrocketing rental prices, they face bills and challenges far more difficult than their predecessors.

There is an intergenerational fairness agenda, but one that is only being addressed informally, and then by the better-off families – the “Bank of Mum and Dad” who support their offspring with cash towards a deposit on a flat or hand them down a family car. For others there is no such help. Again, that is neither fair nor, importantly, in the national economic interest. Scaling back the benefits enjoyed by the older generation and giving some hope to the under-thirties is something the Chancellor could do – and that means more than some minor cuts in stamp duty or dishing out railcards.

All of which leaves us with the difficult task of raising the funds to pay for the many demands placed on the Treasury. Mr Hammond could go even further on reducing tax breaks on pension contributions for the very rich; on persuading large corporations to pay their fair share of tax; on making taxes on diesel fuels, tobacco and alcohol still more prohibitive (especially as the Government has rejected minimum pricing for alcohol outside Scotland); and on making sure that aggressive tax avoidance generally is eliminated. These things will take some political courage, but, in reality, Mr Hammond has little choice. He is running out of options, so narrow has the British tax base become through evasion, avoidance and politically motivated perks.

If Mr Hammond manages to keep, roughly, to his borrowing reduction targets, make due allowance for the costs and damage of Brexit, redress some of the more outrageous intergenerational injustices and do a little more for nurses and students, then he will have succeeded as handsomely as any reasonable observer, or taxpayer, could wish. If so, then he should be allowed as many little quips and gags as he desires during his hour of stand-up at the despatch box.

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