A budget that does nothing to prepare us for the Brexit fallout
PUBLISHED: 09:14 10 March 2017 | UPDATED: 05:24 13 March 2017
© 2017 Bloomberg Finance LP
The Chancellor’s spreadsheets show we are already paying the price of Brexit, yet still nothing is done to protect us from its full, looming impact
Sorry is supposed to be the hardest word to say, but for the Chancellor this week it seemed that Brexit was far tougher to get past his teeth. Six thousand seven hundred and forty seven words in total, and not a single mention of the B-word in his budget.
Now you might have thought that he would pepper his speech with references to our departure from the EU, bashing us Remoaners over the head with the fact that economy has been more resilient this year than we feared before the vote.
He could have pointed to the fact that the deficit is set to be £16 billion less this year than he anticipated last November. Or the better than expected performance of the jobs market. Even the bounce back in average earnings versus previous forecasts. But he didn’t. Because he knows those minor and short-term improvements are nothing compared with the grim prospects for the medium and long term that the Chancellor’s Office for Budget Responsibility predicts once Brexit really bites.
The OBR, in stark contrast, mentions Brexit, or its effects, on almost every one of its two hundred page forecast. The key assumption in their analysis is that Britain will leave the EU in April 2019, two years after the Prime Minister triggers Article 50, and they are crystal clear about what that will mean for our economy: slower growth in business investment and private consumption, lesser trade activity and lower economic performance overall.
Independent and impartial, the OBR says we will import less as our economy slows, and export fewer goods as we shift to enjoy a smaller share of EU markets. In cash terms, it means borrowing starts to climb again next year, rising a £100 billion higher over the next six years than Government planned just 12 months ago, while debt continues to rise from £1.6 trillion to £1.9 trillion by 2022. Taking back control of rising debts for our children.
The welcome, recent rise in earnings will be wiped out too, as wage growth falls back even more than was expected in November. By 2022 mean annual pay will be £1,200 lower than the Government predicted pre-referendum. That means wages will still be below the levels enjoyed by average families back in 2007, an unprecedented fifteen years of shrinking incomes in our country. The worst decade for wage growth in more than 200 hundred years!
And how could wages do anything other than fall back when growth of the economy overall has been revised down in this Budget even compared to the gloomy prognostications from funereal Phil just three months ago. Because even rarer than the word Brexit in his budget address was any acknowledgement that after the slightly better than expected performance of the economy in this last six months, the next six years look bleak.
Gross Domestic Product, the measure of total growth in the economy, is revised down in four out of the next six years, especially towards the back-end of the forecast, when the Brexit fallout really starts to rain down.
The OBR says our economy will be smaller in 2020 than they figured last year, while inflation will be higher and household spending lower. All this leading to the conclusion that the Government will now fail to meet its fiscal objective to “return the public finances to balance at the earliest possible date in the next Parliament”.
Of course the Chancellor knows all this. Self-styled Spreadsheet Phil has run his slide-rule over the numbers and that’s why he knew he needed to raise taxes this year. Now he could have decided to do so for big business, after all they’ve done pretty well out of this government, seeing their taxes fall from 28% when Labour left office to just 18% today. But Brexit, as Theresa May said in her Lancaster House speech, could mean Britain will need to follow an “alternative economic model in future”, one with even lower tax rates for corporations and lesser security for their employees, and so Phil was going to do nothing to undermine his boss. So corporations got another penny off the rate they pay, as reward for their reducing investment.
Instead, in a move that some may find ironic, it was well-off white van man, self-employees earning £50k or more who were the first to feel the Brexit pinch yesterday. In a clear breach of the manifesto commitment made by the Conservatives at the last election, the Chancellor announced a rise in the level of National Insurance Contributions paid by self-employed workers. The justification, he said, was to correct the unfairness of such workers making lesser contributions than those employed by others.
The real reason, of course, was to milk £2 billion from the two million self-employed workers in Britain who have made up almost half the increase in all employment since 2008, and who traditionally enjoy some tax benefits to compensate for the extra insecurity and self-reliance that goes along with being your own boss.
Those hardest hit by the changes will be higher earning individuals in the legal, financial and other professions, for whom there has been a clear and unfair tax advantage to self-employment in recent years, and no doubt there will be few tears shed for them. But as incomes start to climb above £50,000, to salaries that are aspired to by self-employed tradesmen in many parts of Britain, then the offsetting increases in the personal allowance on Income Tax will fall away, and aspirational transit-drivers will also feel the squeeze.
In truth, most of the tax and spending measures in this budget were of marginal significance in the big picture of our pre-Brexit public finances. This was a holding pattern budget, a reflection in itself of the deep uncertainty in which we now find ourselves on our glide-path out of the EU. The Chancellor had a minor windfall in the better than expected performance this year, but chose not to spend it before we know how big the Brexit Bill will be. If it’s anything like the £60 billion that most commentators expect then we can anticipate howls of protest, daubed in technicolour red, white and blue, from May and her mates at the Mail. They will blame the EU, of course, but what we should all remember is what that money might have paid for here in the UK: 270,000 primary school teachers, 24,000 secondary schools, 260,000 nurses, 166,000 new social homes, 1.8 million at the minimum wage and 1,200 miles of electrified train track. That will be the real cost in lost investment and opportunities for Britain.
Yet to borrow a phrase from Donald Rumsfeld, who I think of with a strange fondness in comparison with his successors, the Brexit bill for our divorce from Europe is just the unknown unknown.
More worrying in the long run are the known unknowns: like how Brexit helps us shake of half a century of underperformance in productivity, or deals with the impact of our aging population. Because as the Chancellor points out on page 39 of his own budget book, British output today lags Germany by fully 35%, and France by 27%, while the minimal growth we’ve enjoyed in recent years has been driven by immigration and the economic activity it feeds. If Phil has got a line in his spreadsheet that shows how lower immigration and lesser trade, with countries further from our shores, helps push up production here at home, I think the country needs to hear about it. And soon.
• Owen Smith is the Labour MP for Pontypridd