Philip Hammond has used his “first and last” Autumn Statement to create a £27billion fiscal shock absorber to insure the economy against the uncertainty caused by Brexit.
Mr Hammond was forced to extend austerity into the next parliament as Brexit took its toll on the public finances. But the chancellor said his new looser fiscal rules gave him “firepower in the locker” to rescue the economy if it took a bigger hit than expected.
In a statement dominated by the predicted effects of quitting the EU, Mr Hammond revealed forecasts showing slowing growth despite £23billion of new public investment for housing, broadband, roads and infrastructure.
The Office for Budget Responsibility predicted Brexit would hit taxpayers with an increasing bill, costing families £292million a week by 2020 and £59billion over the full five-year forecasting period.
The additional borrowing assumed to be the result of Brexit will force the next government, elected in 2020, to continue repairing the public finances. Mr Hammond pencilled in another year of public spending austerity in 2020-21 and also hinted that pensioners might have to forgo generous annual uprating of the state pension after 2020.
But there were strong indications that before the famine, there would be more spending in the remainder of this decade. While George Osborne targeted a surplus in 2019-20, Mr Hammond’s new fiscal rules commit him only to running a balanced budget “as early as possible in the next parliament” and to keeping borrowing below 2 per cent of gross domestic product in election year.
Even after increasing infrastructure spending, the new targets still leave Mr Hammond with £27billion of “headroom” in 2020 if he needs to turn on the spending taps. This would be a sizeable election war chest for the 2020 general election if the economy remains strong.
The “jam tomorrow” strategy meant that Mr Hammond had little money available now to help the “just about managing” voters that Theresa May, prime minister, has vowed to support.
A freeze in fuel duty was funded by a rise in the tax on insurance premiums. Mr Hammond softened the edges of Mr Osborne’s planned cuts to universal credit, but at a cost of only £600million in the years to 2020.
The chancellor told MPs that the economy’s “resilience” since the Brexit vote had “confounded commentators at home and abroad”, but he said that the country had to be “match fit” for the transition to life outside the EU.
Pre-referendum forecasts of a Brexit shock by the Treasury and Bank of England had proved overdone but Mr Hammond’s statement was shaped in case the worst is yet to come. “We will maintain our commitment to fiscal discipline while recognising the need for investment to drive productivity and fiscal headroom to support the economy through the transition,” he said.
Mr Hammond also said this would be the last Autumn Statement. Next year there will be, uniquely, two Budgets. From 2018 there will be an Autumn Budget and a short Spring Statement to respond to OBR forecasts.
John McDonnell, the shadow chancellor, claimed Mr Hammond’s spending plans offered “no hope for the future” after six “wasted” years.
He said the figures outlined in the Autumn Statement “speak for themselves”, with economic growth, wage growth and business investment down.
