11 March 2019

Philip Hammond is poised to use his Spring Statement to once again dangle the prospect of a Brexit “deal dividend” in front of MPs. At best the Chancellor would be offering no more than a temporary fillip, argues Dr Gemma Tetlow.

The Chancellor has claimed that money set aside to address “the disruption” of a no deal Brexit would be made available for public services if MPs back the Government’s deal. He said so in his October Budget, and has done so again ahead of the Spring Statement by promising that “...if we get the right Brexit deal done and a smooth exit from the European Union…we can release the money that we have set aside to deal with the possible disruption of a no deal exit.”

Should MPs be swayed by the Chancellor’s offer? A no deal reserve fund exists and could therefore be diverted if the Chancellor chooses, but the sums on offer in fact do little to address the fiscal challenges which Philip Hammond is yet to address.

Official forecasts already assume a smooth Brexit

The Budget in late October set out a plan to reduce public borrowing, from £26bn this year to £20bn by 2023–24. This showed that the Chancellor was on course to meet his objective of borrowing no more than 2% of national income in 2020–21 by quite a margin – with £15.4bn to spare – but still some way short (by the end of the Office of Budget Responsibility’s (OBR) forecast period) of achieving his longer-term goal of eliminating borrowing altogether.

That forecast already assumed that there would be an orderly Brexit, with a smooth transition to a new trading relationship with Europe. Backing Theresa May’s deal would, therefore, do little to alter the broad economic and fiscal picture painted by the OBR.

If there was no deal, however, then the short-term economic and fiscal outlook could look much more challenging, as the Bank of England illustrated last November. In such an event, Mr Hammond has said he would use some of the £15.4bn that he is “holding in reserve” for the 2020–21 financial year to smooth the impact on the businesses and households.

A Brexit dividend does not amount to much

While there might therefore be scope for extra spending in the short term if MPs back Theresa May’s deal, it would do little to ease the difficult trade-offs that face the Government beyond 2020. Big questions still remain about how it will deliver on its promise to eliminate borrowing if it is also committed not to raise taxes.

To achieve the borrowing reduction outlined in the last Budget will require some tight public spending plans. As Carl Emmerson of the Institute for Fiscal Studies outlined at a recent Institute for Government event, planned increases in the budgets for health, international aid and defence mean the Government will have to cut budgets for other public services in real terms – even as the population is expected to grow.

Our Performance Tracker shows that public services have become more efficient over the past eight years. But the easiest savings are likely to have already been found, and there are growing signs across a number of services that quality has been declining (for example, in prisons) or that services are being restricted to those most in need (as in adult social care).

The public should be braced for some tough choices

The Chancellor benefitted from an unexpected dose of good news from the OBR ahead of the October Budget, when the OBR revised down its borrowing forecasts by around £18bn a year in light of stronger than expected growth in tax revenues, continued falls in unemployment and lower than expected debt interest costs.

It is likely that something similar will happen again this week, though probably on a smaller scale. Tax receipts once again seem to be outperforming expectations and debt interest costs are predicted to be lower than was previously thought. This means the OBR is expected to revise down its forecasts for borrowing again; the change is likely to be smaller than in October but could still improve the picture by several billion pounds.

But even that will probably not be enough to remove the need for the Government to answer some difficult questions. If it is committed to eliminating public borrowing and wants to avoid tax rises, then what trade-offs is it willing to make on the quality or scope of public services to stay within budget? The public and MPs may like the sound of a “deal dividend”, but the Chancellor only has scope to boost spending temporarily. If he really is committed to eliminating borrowing without raising taxes, at some point he has to rein spending back in. And at some point the public will need to be told exactly what that will mean.

Comments

Does the budget considers any duties on the income side ? If not, because of not leaving the EU or because a reduction of duty rates down to Zero in case of Brexit ?