Philip Hammond is a fiscal conservative. He wants taxes to be as low as possible, would like to see the government balancing its books and is unhappy with national debt at its current levels.
The chancellor’s problem, as he prepares for the budget, is that he is one of a dying breed. There are no longer many fiscal conservatives around, even in his own party.
Theresa May made life trickier for Hammond when she used her Conservative party conference speech to announce that the public needed to know that all their hard work in helping to repair the state’s finances since the financial crisis had paid off and that austerity was over. While there would be no borrowing binge, “the British people need to know that the end is in sight. And our message to them must be this: we get it.”
What the prime minister actually meant by the end of austerity is open to interpretation. The Institute for Fiscal Studies says that at a bare minimum it involves binning the planned spending cuts for Whitehall departments.
Another thinktank, the Resolution Foundation, thinks that it means going further and that more money should be found to cancel the fourth and final year of the benefit freeze and to restore the cuts to universal credit.
In political terms, it doesn’t really matter which definition is used: the age of austerity that began with George Osborne’s June 2010 budget has run its course.
That initial package of measures from the new Conservative-Liberal Democrat coalition administration did much damage to the economy. It slowed a recovery still in its early stages and set Britain on a low-growth, weak-productivity path from which it has never really recovered.
But in one way Osborne’s plan to front-load austerity and get the pain over as quickly as possible made sense, and that’s because as chancellor he knew that the lesson of history was that voters would eventually grow weary of cuts.
If you look back to the election of 1951, for example, Britain had been subject to strict rationing for well over a decade. The cost of fighting the Korean war involved tax increases and cuts in the weekly allowance of butter, cheese and bacon. As Ken Morgan wrote in his book Labour in Power: “The British public after years of austerity were now being faced with new and even more insupportable burdens.”
Labour won a bigger share of the vote at the 1951 election than it has achieved before or since, but austerity fatigue had set in. There was a limit to the sacrifices people were prepared to make and, just as crucially, for how long they were prepared to make them. At some point between the 2015 election, which the Conservatives narrowly won, and the 2017 election, at which they lost their overall majority, the mood changed. The public decided that enough was enough.
Hammond’s budget will acknowledge the new political reality. He has already let it be known that he will find the extra money the prime minister has promised for the health service, that he will again freeze fuel duty, that the Treasury will allow local authorities to start building houses again and that there will be a package of support for struggling high streets. The chancellor also used his pre-budget interview on the BBC’s Andrew Marr show to drop a broad hint that there would be more money for universal credit.
Even so, Hammond’s message in the budget will be that he is taking a balanced approach: some additional spending but in the context of keeping taxes low, reducing debt as a share of national output and investing in Britain’s future.
Achieving these four objectives is going to be tough, even allowing for the marked improvement in the public finances seen since the spring. In the first six months of the 2018-19 financial year, the government borrowed just under £20bn – almost £11bn less than in the same period a year earlier. This improvement is expected to persist and provides the chancellor with some useful headroom, but won’t be enough to meet all four objectives. Something will have to give: either taxes will have to go up, Hammond’s debt and deficit objectives will have to be scaled back, or the spending squeeze will need to continue.
The chancellor’s budget preparations have also been clouded by uncertainty about Brexit. By now, the Treasury expected the shape of a deal to be clear, but the fact that many outcomes are still possible has meant that Hammond feels the need to maintain enough fiscal firepower to respond in the event of negotiations collapsing. This is a budget that could rapidly be overtaken by events.
Even so, this is still a big political moment because the government needs to be able to frame the end of austerity – however defined – in such a way that it doesn’t appear to be a defeat or an admission that the sacrifices have all been for nothing. As the fall of the last Labour government shows, keeping control of the narrative is vital.
In three successive elections, 1997, 2001 and 2005, Labour’s line was that the economy needed public investment more than it needed tax cuts. All the time that the debate was framed in this way, the Conservatives were kept on the back foot.
In 2010, the argument was turned on its head. David Cameron became prime minister because the election was fought on the basis of which party was best equipped to cut spending. There is now a sense that the terms of the debate are once again shifting, with Labour saying that eight years of austerity have been both painful and economically harmful. Hammond has to persuade the public otherwise; and it is quite a challenge.
