Budget 2017: Philip Hammond won't be able to increase taxes or spending

Many hope this week’s Budget will be a tour de force designed to inspire voters and stabilise the economy. Here's why it's going to be a damp squib.

Inflation is at a five-year high, economic growth is half that of Germany, wages are being squeezed and forecasts are dismal.

So, many people are hoping that this week Philip Hammond will deliver a Budget packed with bold policies to lift us out of economic gloom.

“This is a time for courage and imagination, not miserly bean counting,” the Sun announced in an editorial this week.

Unfortunately, Hammond is “trapped in a prison cell of his party’s making,” says Philip Inman in the Guardian.

Bitter divisions within the Conservative party, a majority so meagre it only takes 10 Tory rebels to shoot down a policy and a watchdog more gloomy than Eeyore mean Philip Hammond is trapped, destined to deliver a Budget that pleases no-one.

The future is grim

When the Chancellor begins his Budget on Wednesday he is going to have to start with some fairly glum economic stats. The Office for Budget Responsibility (OBR), the fiscal watchdog created by George Osborne, has said it plans to “significantly” revise down its forecast for UK productivity growth. This means Hammond can’t make spending pledges paid for by future increases in tax receipts.

And that means he will struggle to meaningfully increase spending unless he can introduce a way to increase the money he has to play with.

He can’t raise taxes

One option would be to announce some tax rises in the Budget. The plan to increase National Insurance Contributions amongst the self-employed that he announced last March would have brought in a much-needed extra £1 billion. However, that plan was embarrassingly shot down by his own party with a Tory rebellion.

The increasingly loud and powerful Conservative backbench has shown it is more than prepared to go against its own party. Add in the fact the Government has such a small majority that it only takes 10 Tory MPs defecting for one of Hammond’s policies to wither and die and any significant tax rise seems very unlikely.

He won’t borrow

With borrowing incredibly cheap at present there are calls for Hammond to throw out his own rule book and increase the deficit.

“There is no reason at all why we need to stick with the fiscal rules as they are,” Matt Whittaker, chief economist at the Resolution Foundation told Reuters. “Borrowing costs are so low at the moment that most, if not all, economists think we should be borrowing more to invest.”

But the Chancellor is known for being fiscally conservative and no-one really expects him to abandon his own pledge to reduce the deficit to zero by the mid-2020s.

“The one thing he has to avoid is any suggestion that the policy of austerity is somehow optional. It is not.” Tory MP Andrew Mitchell told the Financial Times. “We have to show the markets a clear road map back to living within our means.

He can’t increase spending

If he can’t increase taxes and he won’t borrow the Chancellor is left unable to significantly increase spending.

The small amount he can rustle up through small tweaks will be eaten up by the promises the Government has already made since the election – the deal with the Democratic Unionists, the pledge to spend £2 billion on social housing and election promises to increase tax thresholds. Meaning the Chancellor simply has no money left to make any dramatic spending pledges.

That leaves the Chancellor with only one option, to try and deliver a Budget that doesn’t dazzle, but doesn’t cause enough upset to put his job in jeopardy. So, prepare yourself for a very dull Budget.

Of course, there are no guarantees. Perhaps the Chancellor has plans that will completely confound his critics and put the UK back on the path to growth, success and plenty. Until he stands to address Parliament all we can do is speculate. 

However, one thing is certain: Hammond has a lot less wiggle room than his predecessors and an economy that needs some good news.

If you were in Philip Hammond’s shoes what would you do? Let us know in the comments below.

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