Just a few weeks ago, Philip Hammond was buoyed by news that government borrowing for the financial year 2017/18 will come in at £45.3bn; £13bn less than the Office for Budget Responsibility had previously forecast.
But the Treasury should keep the champagne on ice, as today the Institute for Fiscal Studies warns that the deficit may in fact remain as high as £36bn come 2021/22, following a recent downgrade in the nation’s productivity forecast.
This time last year, Hammond said that the Tories would bring the deficit down to 0.7 per cent of GDP by 2021/22, before wiping it out as quickly as possible after that. It currently stands at around 2.3 per cent of GDP, and the Conservative manifesto promised “a balanced budget by the middle of the next decade”.
Faced with sluggish growth and the possibility of a Brexit-induced contraction of tax revenues, the journey to deficit elimination looks precarious. In his Spring Budget back in March, Hammond predicted that a shrinking deficit would be accompanied each year by strong wage growth and increasing business investment all the way through to 2021/22.
Given the current circumstances, this sounds like an optimistic picture. We’ll get revised forecasts on 22 November when Hammond delivers his statement to MPs, but it’s not just economic reality that may give him sleepless nights in the run-up; the political context is just as complicated.
Pressure to turn on the taps of public expenditure has been growing since Labour’s surprise showing in the General Election, and the voices calling for such a move are not confined to the opposition benches.
So far, Hammond has shown little appetite for acquiescing to such calls – as demonstrated by his total dismissal of the communities secretary’s proposal to borrow billions as a way of spurring on housebuilding. Let us hope that the chancellor sticks to his guns.
His aides talk of a “measured and balanced” approach to reducing public borrowing, which hints at both spending cuts and tax rises.
Public tolerance for the former is wearing thin while enthusiasm for the latter exists only among those whose shoulders will not be forced to bear an increased load. Hammond’s Autumn Budget should also be shaped by reform, simplification and confidence-boosting measures.