Philip Hammond has a difficult trick to pull off this week. On the one hand – come clean: the government’s not keeping its promises on the public finances.
On the other hand – convince us: the government is serious about the public finances.
The government was elected with three promises at the heart of its economic plans. Cap welfare spending. Reduce public sector debt as a proportion of the economy, starting last year. And get into surplus, so its income exceeded its spending, by 2019/20 – staying there unless growth dipped under 1%.
The score so far: Promises: nil. Reality: three. As the Institute for Fiscal Studies points out, the government broke its promise to cap welfare spending last year – when it reversed its decision to make deep cuts to tax credits for working families.
Debt piling up
Then it broke its debt promise. The Office for Budget Responsibility’s already confirmed public sector net debt won’t be falling this year from its current level of £1.63 trillion – or 84% of the value of the economy (as measured by Gross Domestic Product).
Next week the OBR’s expected to confirm it will rise not only this year but every year for the next three.
The welfare promise was honoured more in the breach than the observance. Welfare spending has continuously bust through the government’s cap, not least because the government keeps spending more in real terms on pensions (which rose 2.9% last time in spite of inflation of less than 1%). No austerity there.
Those promises were enshrined in law – apparently to make it more embarrassing for any government that dropped them. Yet Philip Hammond ditched promise number three almost as soon as he walked into 11 Downing Street, at very light political cost. Far from attracting opprobrium, it was largely welcomed as pragmatic.
While Brexit has done far less immediate economic damage than the Treasury and others predicted, the tax receipts nevertheless aren’t rolling in as quickly as hoped.
At the last Budget, the economy was expected to grow at an increasingly rapid clip, drawing in tax revenues for the Exchequer to bring the deficit down.
The economy’s expected to slow next year as inflation bites.
If that forecast is right, tax revenues will be further impaired, forcing the chancellor to borrow more to make up the shortfall between his income and what he’s spending – £84bn more over the next five years, according to analysis by the low-to-middle income think tank the Resolution Foundation.
At the last Budget the government was projected to be raking in £10bn more in taxes than it was spending by 2019/20 – a surplus. But now it’s expected to be £15bn in deficit.
Mr Hammond’s keen for the government to retain an air of “fiscal credibility” – not least because without it, the pound might fall further.
That leaves him with an interesting choice. He could switch to a promise more easily realised – such as promising to spend less than his income on day-to-day expenditure like benefits and civil service wages but allowing borrowing for investment.
Or he could keep the promises as aspirations for the future – but ditching the deadlines. And as anyone who has tried to diet, give up smoking or phone their parents more often knows, promises are far easier to keep without deadlines. As St Augustine said: “Oh Lord make me pure. But not yet.”