Chancellor Philip Hammond is determined to keep his Spring Statement free from tax changes or public spending announcements, but that will not stop Wednesday’s parliamentary event being highly political.
Mr Hammond, one of the most vocal backers of a soft Brexit in Theresa May’s cabinet, will present his statement to MPs the day after they are due to vote on the prime minister’s exit deal.
He said at the weekend that if the House of Commons backs the deal, he can move on to considering the case for increased spending on public services, cutting taxes, and reducing the deficit.
While the Spring Statement may well be overshadowed by Brexit, it will nevertheless be a significant event partly because it will contain new forecasts for economic growth and the public finances. Below are five things to watch out for.
1. The economy
The immediate prospects for economic growth are poor, after output rose only 0.2 per cent in the fourth quarter of 2018.
The Office for Budget Responsibility, the UK fiscal watchdog, is due to mark down its growth forecast for 2019 from its existing prediction of 1.6 per cent to something closer to the 0.8 per cent estimate recently made by the OECD, the Paris-based international organisation.
Mr Hammond is expected to skate over this bad news and concentrate on some of the economy’s strengths.
With inflation below the Bank of England’s 2 per cent target, allowing real wages to grow, the chancellor is likely to highlight the rude health of Britain’s labour market.
The employment rate is at a record high of 75.8 per cent, with the OBR likely to predict a continued modest rise throughout its five year forecast period.
With jobs plentiful, Mr Hammond is due to say that now is the time for the government and businesses to focus on improving productivity growth, which has been the economy’s greatest failing over the past decade.
2. The public finances
Mr Hammond will be able to bask in improved forecasts by the OBR for the public finances.
He has said that strong income tax receipts, driven by a surge in pay rises for Britain’s highest earners, has boosted the revenues going to the exchequer.
The OBR is likely to judge this move is part of a wider trend, thereby enabling it to cut its estimate of the deficit by a few billions of pounds in each year of the watchdog’s forecast period.
A further boost to the public finances will come from the OBR making its prediction for the government’s future debt interest payments in early February, when financial markets were convinced interest rates would barely rise from the current 0.75 per cent for almost all of watchdog’s five year forecast period. This reduces the forecast for part of public spending.
3. Brexit
If Mrs May’s Brexit deal is rejected by the Commons on Tuesday, Mr Hammond will make his Spring Statement just a few hours before MPs vote on the case for the UK leaving the EU without an agreement.
In those circumstances, Mr Hammond is expected to highlight OBR and government assessments that the economy would be hit hard by a no-deal Brexit.
He has described the possibility of Britain crashing out of the EU as “very bad” for the economy, limiting his ability to find extra funding for police, schools and defence.
While he has made clear the Treasury would spend money to reduce the immediate impact of a no-deal Brexit on the economy, the chancellor’s main message is likely to be that anything other than voting for Mrs May’s deal would prolong current economic weakness.
4. Consultations on reform
When Mr Hammond moved to one fiscal event a year in 2018, he said the Spring Statement would be used to launch public consultations on changes to the tax system, so that ministers could test out ideas.
Treasury officials are concerned that consultations due to be launched at this statement on Wednesday might get overshadowed by Brexit news, and therefore fail to serve their intended purpose.
The Treasury said that Mr Hammond would announce proposals to make the economy more environmentally sustainable, including a “review of the economics of global biodiversity”. Another expected consultation will follow a review of competition in the digital economy by Jason Furman, a Harvard professor and former adviser to US president Barack Obama. A third could focus on improvements to infrastructure financing after delays and cost overruns with Crossrail, the flagship rail project in London.
5. The spending review
Mr Hammond likes to be an orderly chancellor who keeps his promises, but he has not kept his pledges on the next public spending review.
One year ago he said he would “set an overall path for public spending for 2020 and beyond” in the 2018 Budget and then failed to do so. He is also unlikely to set a firm path for total public spending by Whitehall departments after 2019-20 in the Spring Statement.
He thinks this process can only start once ministers know what will happen with Brexit.
