Hammond’s Budget could be pretty good – here’s how

Here’s a potential turn up for the books; could Philip Hammond save his political bacon by delivering a Budget next week which transforms him from Spreadsheet Phil into Santa Phil?

It’s not the conventional view that he can do it. Michael Gove is auditioning for his job amid growing clamour for the ghoulish Chancellor to be sacked and replaced by a more optimistic pro-Brexiteer.

But its the view of Simon Ward, one of the City’s most respected economists, who suggests Hammond may have up to £5bn more than expected to play with in next week’s Autumn Budget. The reason that Ward is optimistic, certainly more sanguine than most City scribes, is that the last year has seen lower public spending but also stronger tax receipts, making the fiscal position look rosier.

Ward, chief economist at Janus Henderson, estimates the Chancellor will have up to £5bn to spend and still be able to meet the new Charter for Budget Responsibility target, which aims to reduce cyclically-adjusted borrowing to below 2% by the end of the Parliament.

Although the Office for Budget Responsibility is likely to downgrade medium term growth forecasts for the next year, Ward also reckons these downgrades will not be as aggressive as many suspect. He says: “My estimates are that Hammond is on course to show that he will meet 1.5% of the deficit target, which gives him this room to manoeuvre.”

If correct, this suggests the Chancellor will have a decent slug of extra money to spread around which is most likely to go on lifting the public sector pay cap, working benefits – particularly universal credits – and more money to the NHS.

But the big question is whether, if this is the case, Hammond is capable of delivering this good news in a way that everyone understands that it is good news.

Today’s Budget’s are more about political theatre and about setting the tone than the economics. Which is why this Budget is so crucial, and why perhaps rather unfairly, all eyes are on Hammond as the one who is in the best position to rescue the government and put pep back into its spirit.

The trouble is that the Chancellor is by nature a cautious and serious man, a fiscal conservative who is not given to theatrics. But now – and according to Reaction’s story this week that Hammond faces the sack with the Prime Minister pricing in a disastrous Budget – even he knows that he is standing in the last chance saloon.

Yet if Ward’s prognosis is accurate, Hammond has the perfect opportunity to throw his native fiscal conservatism to the wind and do a Santa. He has nothing to lose.

Does Hammond have the balls to do something big and bold? Is he brave enough to follow his instincts, which according to those closest to him, are at heart those of a pro-business, low-tax reformer?

The great Chancellors are those who have been courageous enough to make lasting changes which transform lives and, as Lady Thatcher used to say, their “take home pay.”

There are two great Chancellors from whom Hammond still has time to take lessons: Geoffrey Howe and Nigel Lawson. Howe’s budget in 1981 was transformative: the basic rate of tax was cut from 33p to 30p while the top ‘earned’ rate of 83p and the top ‘unearned’ of 98p were cut to 75p. Tax thresholds were increased, well above inflation, taking 1.3m out of income tax altogether and 550,000 out of the higher rates.

Yet at the same time Howe cut public spending, sending a clear message to the country to live within its means.

Nigel Lawson’s Budget in 1988 – the last Budget speech to be untelevised – was just as radical, cutting income and corporation taxes as well as smoothing out tax inequalities.  Both Howe and Lawson’s budgets were defining moments that encapsulated Thatcher’s political philosophy but perhaps more pertinently, put that philosophy into action.

As well as the brains, they had the balls of steels to do that and Hammond needs the same steel on Wednesday.  He should start by killing off the word austerity forever: it’s a word that has not only outgrown its purpose but was always the wrong one to use.  As my twenty something year old daughter said to me recently: “Whenever I hear austerity, I hear poverty.”

Surely, that’s not the message that Hammond would choose as his legacy? There are so many alternative approaches. First, he needs to make housing a priority. There are many easy and cheap ways to do this, starting by cutting stamp duty, not for the young because that’s just another gimmick, but for everyone. Bring the duty down to 1% – for all homes, and end Help to Buy, a scam which has served its purpose.

He should also allow councils to buy and sell land at market prices and at the same time force them to speed up planning consent; the supply of land is still the biggest issue. If he needs a little help, he should talk to the visionary Nigel Wilson, head of Legal & General, who (for now) is doing more to revolutionise the housing market than anybody else in the UK.
Second, he should instigate a new golden era for infrastructure spending on transport, announce a vote on Heathrow, give blessing to a new Crossrail 2, confirm HS2 and give the go-ahead for HS3 – vital if the Northern Powerhouse is to work.

None of these projects need much new government money either, so they should not hurt the deficit target. Many of them can be achieved by working in partnership with the private sector and pensions funds, most of them yearning for somewhere to place their funds to earn higher yields for the long-term.

Backing such projects, and boosting new business investment, would boost productivity too, the key to higher wages. Often missed in the debate about the UK’s low productivity numbers is that we also have many frontier companies in the biotech, life sciences and tech sectors whose productivity levels are among the highest in the world. We just need lots more of them. And we need to learn from them.

Third, SMEs and entrepreneurs need some comfort on costs: more thought still needs to go into reforming business rates while a holiday should be given to small businesses introducing auto-enrolment for pensions.
Finally, Hammond should seek to shake-off his image of being  chief Remoaner at No 11 and come up with some pro and post-Brexit wheezes to lift confidence whether that’s a new sovereign wealth fund or a new tech fund to come up with new technologies to sort out customs controls.

If Hammond is brave enough to be Santa, he would realise there is no shortage of brilliant gifts that don’t even cost that much. And he might keep his job.