LONDON — U.K. Chancellor Philip Hammond announced a major spending boost to stimulate the British economy over the next two years as growth forecasts were revised downwards in his budget statement Wednesday.
Addressing MPs in the House of Commons, the chancellor announced a raft of new spending measures, including billions more for housing, health and welfare, while also setting aside an extra £3 billion to prepare for “every possible outcome” in the Brexit negotiations. That is on top of £700 million already promised for preparations ahead of Britains departure from the bloc in March 2019.
The extra spending pledges — totalling some £25 billion — came despite a deteriorating outlook over the next five years, with the independent Office for Budget Responsibility (OBR) revising growth down every year until 2021 and forecasting GDP growth will not top 2 percent as productivity, high inflation and Brexit weigh on output.
The economy is now forecast to be £65 billion smaller in 2020 than had been forecast in the March 2016 budget.
Faced with a slowing economy, continuing Brexit uncertainty and growing political pressure, Hammond chose to loosen the governments purse strings.
He announced an extra £2.8 billion for the health service over three years, more than £1 billion to ease problems in the welfare system and £500 million to scrap housing taxes for first-time buyers. A major capital investment in housing and the NHS was also announced.
The extra spending is mostly front-loaded to act as a stimulus for the economy in what the OBR described as a “significant near-term fiscal giveaway” adding almost £12 billion to borrowing by 2019/20.
The big picture is of a dramatically deteriorating medium-term outlook. While falling short of predicting a recession, the OBR forecasts growth falling in 2017 to 1.5 percent, cut from 2 percent as predicted in their previous forecast, in March. The OBR now forecasts GDP growth will be 1.4 percent in 2018 and 1.3 percent in 2019, before picking up to 1.5 percent in 2021.
“At first sight, the chancellor just about managed to keep his balance” — John Hawksworth
John Hawksworth, chief economist at PwC, said the chancellor had walked a narrow tightrope between maintaining fiscal prudence and responding to widespread pressure to ease austerity.
“At first sight, the chancellor just about managed to keep his balance,” he said. “The chancellor was able to provide some carefully targeted giveaways to support housing, health, skills and infrastructure while still keeping the budget deficit on a downward path.
“The budget provided a significant net giveaway in the short term, peaking at just over £9 billion in 2019-20, according to the OBR, but with most of this being clawed back in later years so that the net giveaway fades to a relatively insignificant £1.5 billion in 2021-22. The phasing of this temporary fiscal loosening, including extra spending on Brexit preparations for the next two years, seems designed to help ease the economy over the difficult transition period to leaving the EU while still keeping within existing fiscal targets in the medium term.”
The budget was seen as a make-or-break moment for Hammond, who has found himself under increasingly heavy fire from all wings of the Conservative Party over his performance in recent months.
MPs and aides privately acknowledge he cannot afford another blunder on this scale.
Brexiteers were openly critical of his push for a “soft” exit from the EU, with some agitating for him to be replaced with a “true Brexit believer” to steer the economy through Britains exit from the bloc in March 2019.
However, he has also come in for criticism from more left-leaning Tory MPs who wanted him to end the governments austerity program that has been in place since 2010 in a bid to counter the rise of Jeremy Corbyns Labour Party.
In his last budget statement in March this year, Hammond blindsided MPs by raising taxes on self-employed people, sparking a furious public backlash. Within a week he was forced to abandon the policy after it was shown to break a key David Cameron manifesto pledge not to raise income tax, VAT or national insurance.
MPs and aides privately acknowledge he cannot afford another blunder on this scale. Days before Wednesdays statement, however, the chancellor landed himself in further trouble after claiming “there are no unemployed people” in the U.K., despite 1.4 million people being out of work.
Hammond has come in for criticism from more left-leaning Tory MPs who wanted him to end the governments austerity program| Andy Rain/EPA
In a move designed to appeal to younger voters, who overwhelmingly backed Labour in Junes general election, the chancellor announced policies designed to help young people get on the housing ladder and other measures, including an expansion of discounts on rail travel for those aged 30 and under. Stamp duty — a fee levied on house purchases — will be abolished in the U.K. for all first-time buyers of houses worth under £300,000, Hammond said.
The chancellor said the measure would help “young first-time buyers” ensure they had enough cash up-front to put their first foot on the property ladder.