Spring Statement preview: No smoke and mirrors without fire
The Chancellor is due to be addressing the financial state of the nation tomorrow and is probably as much in the dark as the rest of us when it comes to knowing how much money he needs to spend, or more precisely, save, writes Philip Fisher.
Sometimes our Parliament has a way of making people look very stupid.
In November, when the Chancellor of the Exchequer delivered his Autumn Statement, an accountant writing on this very website suggested that he was wasting his time, since it would have made far more sense to defer any decisions until the Spring Statement, by which time we would know exactly on what terms Britain would be leaving the European Union only a couple of weeks’ thereafter.
Four months on, it’s hard to see the computer screen for all the egg covering my face.
Philip Hammond is due to be addressing the financial state of the nation tomorrow and is probably as much in the dark as the rest of us when it comes to knowing how much money he needs to spend, or more precisely, save.
Bad news seems to be piling on worse at present, with perhaps the most devastating of all the information released yesterday in a report by think tank New Financial that £900bn (or more than 10%) of all of the funds held by banks in the UK has moved offshore as a precaution against the perceived terrors of Brexit.
That sounds disastrous but may only be the tip of the iceberg, since it has been motivated by nothing more than concerns about possible issues. When we finally come to a decision about if, when and how to depart from Europe, there has to be the chance that a significant proportion of the remaining 90% follows suit.
According to BBC reports yesterday, in order to plug the gap that the loss of tax from this source will create, Mr Hammond would have to add an additional 1% to income tax. That is a cheerful thought ahead of a Spring Statement that may contain very little of substance and, one can be sure, no 1% increase in tax rates for voters who are already very jittery.
Before addressing other fiscal matters, we have to recognise that if the media pundits are reading the runes accurately, the Chancellor may feel obliged to announce significant spending measures, primarily designed to persuade his fellow MPs on both sides of the chamber to support the Prime Minister at this time of dire need.
Therefore, unless borrowing is to increase, Hammond will either need to pull out his very best smoke and mirrors techniques to reassign amounts already committed, an old favourite ploy of his, or find ways of increasing taxes that do not seem too unpalatable.
All of this is merely short-term sticking plaster stuff. The real issues that one would expect the Chancellor to address are the costs that his own department has predicted will result from the European departure. Regardless of what might happen in 10 or 20 years from now, it seems to have been generally accepted by all parties (and all of the many parts of the Conservative Party) that there will be massive costs to the nation as a result of the decision to go it alone and depart from Europe, even if we get the best possible outcome, whatever that might be.
If there is a no deal Brexit then we must presumably expect to see significant hikes in taxes to pay for the pleasure, especially as we are nowhere near to trading deals with the majority of key countries. Even with some kind of carefully managed arrangements, there will still be significant costs. While these could possibly be substantially clawed back by cutting expenditure in other areas, defence, education and foreign aid have all taken a battering already.
At the time of writing this article, it was unclear whether Mr Hammond might take a backseat tomorrow as a second debate on whether no deal should be removed from consideration was still in the offing.
Given this context and the complete lack of information about the country’s plans, the likelihood is that there will be no significant tax changes announced. Instead, Mr Hammond will probably make a big fuss about piling money into certain areas of the country that are strategically important to his Prime Minister this week, ideally sourced from amounts already promised.
What happens next is anyone’s guess. Conceivably, something substantive on Europe followed by a change of Prime Minister and the desperate need for Mr Hammond to return to the dispatch box imminently in order to shore up the country’s parlous finances.