LONDON — The Brexit upside is just around the corner, Chancellor Philip Hammond said Monday — as long as the divorce is a smooth one.
In a thinly veiled appeal to restive Conservative MPs to get behind Prime Minister Theresa May’s Brexit strategy, Hammond used his final annual budget announcement before the U.K. leaves the European Union to say that securing a deal with Brussels would mean more money for government spending.
The budget marks a key test of Prime Minister Theresa May’s brittle authority as she enters the final few weeks in which it is still possible for her to secure agreement with the EU27, avoiding a disorderly exit and economic disruption.
Conservative Brexiteer MPs, concerned that the prime minister’s Brexit plan will bind the U.K. too closely to EU rules, had been reported to be planning to vote down the budget but now look very unlikely to do so when the House of Commons votes on the economic plan on Thursday.
Likewise May’s Northern Irish backers, the Democratic Unionist Party, who had threatened withdraw support over the budget in order to underline their leverage in the final stages of negotiations with Brussels, also appear placated. Hammond singled out Northern Ireland for investment with £350 million set aside for the Belfast region, among other measures. The party’s Westminster leader, Nigel Dodds, tweeted that the DUP’s confidence-and-supply agreement with the government is “delivering again.”
In a sign of a change in the U.K.’s political weather, the chancellor used a surprise boost in tax receipts to spend more on public services, the vast bulk of which will go to the National Health Service, rather than using the windfall to balance the books. In a muted budget statement, Hammond said that “the era of austerity is finally coming to an end,” pledging increased investment in the years ahead.
Brexit fog
With Brexit overshadowing proceedings, as it has done since the 2016 EU referendum, Hammond did not miss the opportunity to underline the upcoming choice the government is keen to impress upon MPs: Back whatever deal the prime minister can agree with Brussels or leave without one.
If there is a Brexit deal, Hammond said, business investment would increase as a result of renewed certainty about the post-Brexit economic landscape. He would also be able to release fiscal reserves held back to pay for government interventions in case the U.K. leaves the EU without a deal.
“We’re at a pivotal moment in our EU negotiations and the stakes could not be higher,” Hammond said. “Get it right and we will not only protect Britain’s jobs, businesses and prosperity but we will also harvest a double deal dividend: a boost from the end of uncertainty and a boost from releasing some of the fiscal headroom that I am holding in reserve at the moment.”
The U.K. business lobby declared themselves broadly encouraged by the direction of travel signaled by some of the chancellor’s piecemeal measures — extra tax relief for business under the annual investment allowance, reforms to business rates paid by high street shops — but acknowledged that in terms of the biggest issue facing them, Brexit, the dial hasn’t moved.
“While today’s budget measures were largely positive for business, the final and most important piece of the jigsaw is a comprehensive Brexit deal that gives firms the clarity and precision they need,” said Adam Marshall, director general of the British Chambers of Commerce.
The Institute for Directors Director General Stephen Martin went further, saying businesses would be “deeply disappointed” that Hammond has not earmarked funding to help firms prepare for different Brexit outcomes.
The Labour Party, on the other hand, focused its firepower on highlighting what it sees as distance between May’s pledge to “end austerity” and the reality of the chancellor’s cautious budget.
“We now have it confirmed that the pledge to end austerity was a broken promise, like the whole budget,” Shadow Chancellor John McDonnell said in a statement.“It is now clear austerity is not over, the cuts to social security will continue and Philip Hammond gave no assurances that departments won’t face further cuts.”
No-deal cliff edge
The government’s independent economic forecaster, the Office for Budget Responsibility, admitted it s working with the same “broad brush” estimates as to the impact of Brexit that it has been using since 2016, based on what it describes as a “relatively smooth” exit, and taking into account the two-year transition period in which Britain’s relationship with the EU would continue much as before.
Neither of these assumptions are yet guaranteed, meaning the forecasts on which this budget rests could be in tatters in five months’ time if the U.K. leaves the EU without a deal.
“A disorderly [Brexit] could have severe short-term implications for the economy, the exchange rate, asset prices and the public finances. The scale would be very hard to predict, given the lack of precedent,” the OBR’s accompanying document said. In other words, Hammond is to some extent flying blind.
The OBR called a no-deal Brexit “the most immediate and significant” downside risk currently affecting the British economy.
While the U.K. economy has held up better than some had expected, the OBR said that the associated fall in the value of the pound has “squeezed real household incomes and consumption,” and that uncertainty surrounding the negotiation has “dampened business investment.” Average quarterly growth has slowed from the (not very impressive) 0.6 percent the U.K. saw between 2013 and 2015, to 0.4 percent since the beginning of 2016.
With the chances of no deal rising, Hammond said he would allocate an extra £500 million to government departments to pay for Brexit preparations — on top of £1.5 billion already allocated for 2019-2020.
He added that he is “retaining firepower to intervene if the economy needs more support in the coming months.”
However, many important funding decisions will not be made until next year’s comprehensive spending review. Directly linking Brexit to the government’s hopes of extra spending, Hammond said the “deal dividend will allow us to provide further funding for the spending review.”
Tech tax
Elsewhere in the budget statement, Hammond announced a tax on major tech companies that he said would raise £500 million a year by 2020.
In a move that jumped the U.K. ahead of European Union policymakers and the 36 members of the Organisation for Economic Co-operation and Development who are also drawing up proposals, the chancellor set out his own timeline for a new tax that appears to be aimed squarely at the likes of tech behemoths Google, Facebook and Amazon.
The proposals place London ahead of others eager to squeeze out extra income from Silicon Valley, whose companies have pocketed oversized profits in recent years to become some of the world’s most valuable firms. But by taking on Big Tech, British policymakers are betting that these same companies will not jump ship from Britain after Brexit after the likes of Google and Facebook announced multibillion-pound investments in London, arguably Europe’s biggest tech hub.
“The rules of the game must evolve now if they are to keep up with the emerging digital economy,” Hammond told MPs. “It is only right that these global giants, with profitable businesses in the U.K., pay their fair share towards supporting our public services.”