From the moment she arrived in 10 Downing Street, Theresa May has been commendably clear about her economic priorities for Britain. She wants the country to be a beacon of free trade, at a time when protectionism is on the rise the world over. She is annoyed at the way in which quantitative easing has manipulated asset prices, making property unaffordable. And while David Cameron was very successful in raising the incomes of those at the bottom, she is concerned that those in the middle have not fared as well. She wants a ‘country that works for everyone’ — that is to say, one where effort is always rewarded.
This is, alas, no cliché. Even now, those who move from welfare to work have their support withdrawn so quickly that they can end up keeping just 24p in every extra £1 they earn: an effective tax rate of 76 per cent. Iain Duncan Smith planned to change that with Universal Credit. But his ideas proved too expensive for George Osborne, and the new system ended up being almost as bad as the old. This has all added to the problem that the Prime Minister rightly identified: an economic system which many millions find to be rigged against them.
So could Mrs May succeed where Cameron failed? Philip Hammond has yet to present his first Budget; this week he delivered an Autumn Statement which is far more limited in scope. He did use it to try to repair some of the damage inflicted to Universal Credit and restore work incentives, but the effective tax rates are still hideously high. As is the national debt. For six years, George Osborne fought the deficit — and the deficit won. Our national debt was £1 trillion when he took office and £1.6 trillion when he left — or an extraordinary £59,000 per household. This is real debt, which must be financed through taxes imposed on this and subsequent generations. Mr Hammond now proposes raising the debt to £1.95 trillion. Faced with a choice between less spending and more debt, the Chancellor followed the new Tory tradition of choosing debt.
His promises of a £23 billion infrastructure project might sound like a Donald Trump-style splurge. But the Treasury small print reveals almost no alteration in what little the government is spending on infrastructure — or in much else. In his defence, the Autumn Statement is not an appropriate occasion to rewrite government economic policy. But there have been strikingly few changes. A housing white paper promises to examine once again what has become one of the most intractable problems in Britain. But Mrs May had it right first time: when rates are low people borrow more, so prices rise accordingly with mortgages. No amount of construction can puncture an asset bubble.
Unable to take much action on the debt, the more pressing question for Hammond is how much can be done for the ‘just about managing’. Those who worked for Mr Cameron said that this was his great blind spot.
But Cameron’s great error was to steal Ed Miliband’s policy of a far higher minimum wage. The official government estimate is that its £9 per hour wage will price about 60,000 workers out of the economy and make them unemployed. We have never heard what is to be done for, or with, them. The great risk is that this, again, means that the income of those in the middle stalls (or falls), as companies struggle to find the money to afford the higher minimum wage. In other words, this policy could well end up hurting rather than helping the ‘just managing’ classes. A radical Chancellor might have abandoned this policy altogether, and thought of better ways of helping the low-paid. If Hammond does have such ideas, we didn’t hear about them.
The last government did manage some impressive achievements: pensioner poverty is at a record low; employment is already at a record high and is forecast to rise by a further 500,000. This figure is all the more striking given that the Treasury said 500,000 jobs might be lost if Britain voted for Brexit. That document has been proven spectacularly wrong. And Britain will close this year with the fastest growing economy of any major country.
Mr Hammond is not, by nature, an optimistic chap. He predicted disaster after a Brexit vote and speaks as if he still half-expects it. A recession may well strike: Britain hasn’t had one for some time. But we have, so far, seen nothing that suggests the vote has had any impact. An over-valued pound has fallen back towards a more realistic value, but the FTSE100 is nearing a record high. He should consider that there is a chance things may go badly right.
This is a hard time for the Treasury. As an institution, it damaged much of its credibility with its hysterical warnings about Brexit. But its job, and that of the Chancellor, is to spot and exploit the many opportunities with which the country is now presented. The Autumn Statement did not do much to help this, which is perhaps why Hammond has now abolished it. The Chancellor has a proper Budget planned in the spring: let us hope that it will be more impressive.
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