Philip Hammond has dropped the broadest possible hint that he will announce spending increases later this year as he sought to use a modest improvement in the public finances to indicate more money was on the way for hard-pressed public services.
The chancellor seized on new forecasts from the Office for Budget Responsibility showing a £5bn drop in the government’s budget deficit to say that he expected to have scope to act in his autumn budget. Hammond was accused of “astounding complacency” by the shadow chancellor, John McDonnell, but said higher spending had to be accompanied by further action to reduce government borrowing and the national debt.
“If, in the autumn, the public finances continue to reflect the improvements that today’s report hints at, then in accordance with our balanced approach … I would have the capacity to enable further increases in public spending and investment in the years ahead,” the chancellor said.
Although the chancellor was in upbeat mood as he presented his statement, the OBR said not much had changed since the government’s independent forecaster issued its last set of economic and financial forecasts in November 2017, which contained a sharp downgrade of the economy’s long-term growth potential.
“The economy has slightly more momentum in the near term, thanks to the unexpected strength of the world economy, but there seems little reason to change our view of its medium-term growth potential,” said the OBR.
Over the next five years, the OBR said it expected growth to average 1.4% a year, with a slightly better performance in 2018 matched by a weaker forecast for 2021 and 2022, with growth expectations revised down by 0.1 percentage points to 1.4% and 1.5% respectively. It noted that average earnings adjusted for inflation would increase by just 3.5% over the next half decade, leaving them similar to their 2007-2008 level in 2022-23.
The forecaster also warned that there had been seven recessions in the past six decades and that there was a 50-50 chance of another one in the next five years.
McDonnell said: ”Today we have the indefensible spectacle of a chancellor congratulating himself on marginally improved economic forecasts, while refusing to lift a finger as councils go bust, the NHS and social care are in crisis, school budgets are cut, homelessness has doubled, and wages are falling.”
The head of the Institute for Fiscal Studies thinktank, Paul Johnson, said the economic forecasts were “dreadful”.
Hammond repeatedly took aim at Labour during his speech, hinting at the battle lines for a future general election clash by claiming McDonnell’s economic policies would “undermine our recovery, threaten investment in British jobs, burden the next generation and waste billions and billions of pounds more on debt interest”.
By contrast, he repeatedly promised to take a “balanced approach”, adding: “There is indeed light at the end of the tunnel, but we have to make absolutely sure that it is not the shadow chancellor’s train hurtling out of control in the other direction towards Labour’s next economic train wreck,” he said.
Hammond’s statement was warmly cheered by Conservative MPs, a growing number of whom have been warning Downing Street about the intense pressure on public services in their constituencies.
Johnny Mercer, the MP for Plymouth Moor View, said, “the great news about the debt he’s talked about is important; but it’s not going to win us many voters on the doorstep. But he talked about increasing public spending, and he sent a strong signal on the NHS – and I’ll be lobbying away between now and the autumn and trying to make that happen.”
By November, the Brexit secretary, David Davis, hopes to have agreed the outlines of the UK’s future relationship with the EU 27, allowing the OBR to carry out a more detailed forecast.
Nicky Morgan, the chair of the Treasury select committee, welcomed Hammond’s upbeat tone, but said he was right to be cautious about turning on the spending taps, and should not “undermine our own argument about fixing the roof while the sun is shining”. “I’m not sure anyone would say that the sun’s really out at the moment,” she added.
Labour’s Rachel Reeves, the chair of the business select committee, said: “It’s all jam tomorrow. What schools and hospitals need is money now.”
The OBR also set out full details of the Brexit bill the government agreed to pay in December’s EU withdrawal agreement. It estimates that about 75% of the £37bn financial settlement will be paid by 2022 – with smaller payments, based on future EU pension liabilities, extending to at least 2064.
By 2022-23, that means the government will be paying £5.8bn less to the EU than as a member – but the OBR said that sum has been more than accounted for by spending pledges such as maintaining the level of farm subsidies, and continuing payments into some key EU institutions.
Taking back control of Britain’s EU contributions became a key element of the leave campaign during the 2017 general election, with Vote Leave suggesting they could be diverted to the NHS.
But the OBR warned the economic effects of Brexit would likely outweigh the reduced contributions into the budget. “It is important not to view these figures in isolation,” it said. “While this is one of the more direct ways in which leaving the EU impacts upon the public finances, it is unlikely to be the largest one.”