Philip Hammond’s promise of a Brexit dividend has been called into question amid signs of sluggish economic growth and warnings of a knock-on effect for the public finances.
Figures released on Monday showed the UK economy grew by just 1.4 per cent in 2018 – its slowest rate for six years – while growth in the three months to December stalled to a mere 0.2 per cent.
Falls in factory output and car production were behind the slowdown, according to the Office for National Statistics – with both industries mirroring global trends.
The pound fell below $1.29 after the GDP figures were released, and despite a slight rally it slumped to $1.286 by Monday evening.
The slower-than-expected growth means the Chancellor is likely to have even less fiscal firepower to deliver the "Brexit deal dividend” he promised in the Autumn Budget, with the government committed to pumping an additional £20 billion into the NHS, ending austerity and cutting the deficit.
Speaking yesterday, Hammond said: “It’s a solid performance from the economy when you look at what is happening globally and in other competitor countries but of course there is no doubt that our economy is being overshadowed by the uncertainty created by the Brexit process and the sooner we can resolve that the better, the quicker we can get back to more robust growth in the future.”
The Institute of Economic Affairs' Julian Jessop warned against the Chancellor “hitting the panic button”, adding: “It’s a bit late now anyway to do anything about Brexit-related uncertainty, though it would have helped if the government had done more sooner to reassure businesses that the economy was well prepared for ‘no deal’.
“If the Treasury does announce anything substantial now, including a large fiscal stimulus, there is a risk that it proves to be unnecessary and even counterproductive, driving up interest rates.”
Even before the figures were published Hammond was facing claims from the Institute for Fiscal Studies he would need to find at least a further £10 billion to end austerity, as promised by Theresa May at the Conservative conference last October.
Vicky Pryce, chief economist at the Centre for Economics and Business Research, warned the Chancellor had backed himself into a corner with the flurry of pledges in the Autumn Budget.
She said: “I don’t see how he can make his promises a reality unless he does something like borrowing more, which will be easier than raising taxes.”
The figures came as the Treasury Select Committee poured scorn on the notion of a Brexit dividend, with MPs saying it was “not credible” to talk of an economic boost by simply avoiding a no deal Brexit.
Conservative MP Nicky Morgan, chair of the committee, said: "The OBR already assumes an orderly Brexit, so there won’t be a ‘deal dividend’ beyond the forecast just by avoiding no-deal. Business confidence may improve with increased certainty, but it’s not credible to describe this as a dividend."
Responding to the committee, a Treasury spokesperson said: “Restoring the public finances to health is a result of good economic management, not luck. Debt is now falling on a sustained basis for the first time in a generation, wages are growing at their fastest rate in over a decade, and… the UK economy grew for a ninth consecutive year.”
May will on Tuesday update MPs on the ongoing negotiations with the EU after parliament sent her back to Brussels to look again at the thorny issue of the Irish border backstop.