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The pressure builds on Philip Hammond’s Budget

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As Philip Hammond approaches his November Budget, the pressure on him is increasing. Growth is slowing, living standards are being squeezed and there is a powerful public appetite for extra government spending. The challenge for the chancellor is even greater than he faced in the immediate aftermath of the EU referendum last year. 

In Whitehall, the great obsession with Brexit is being accompanied by the seasonal ritual of budget making. Philip Hammond’s first November Budget, a successor to both the traditional March Budget and the Autumn Statement, is looming larger in everybody’s sights. Budgets are political events, and the politics are important. A troubled and divided government is having to cope with both austerity fatigue among voters and the need to spend more.

Yet there is, to coin a phrase, no magic money tree. On 22 September, the ratings agency Moody’s downgraded Britain’s sovereign debt rating a further notch to Aa2. Though the agencies suffered reputational damage in the financial crisis, their views are still taken seriously. Britain’s retreat from the top ‘triple-A’ rating it once enjoyed has accelerated since the vote for Brexit in June 2016. The Treasury responded angrily to the timing of the Moody’s downgrade, coming as it did in the wake of improved figures for the public finances and, more significantly, on the day of Theresa May’s speech in Florence on the EU.

Treasury officials will not, however, mind too much. The downgrade is useful ammunition for them in their battle to prevent too big a fiscal relaxation. Already, however, according to the Moody’s assessment, the chances are that some of these battles will be lost.

As the ratings agency put it: ‘Moody’s expects weaker public finances going forward, partly linked to the economic slowdown under way but also reflecting the increasing political and social pressures to raise spending after seven years of spending cuts. Since 2015, the government has been finding it increasingly difficult to implement the spending cuts that it has been targeting, in particular on welfare spending. More recently, the government has yielded to pressure and raised spending in several areas, including for health and adult social care. It also agreed to above-budget pay increases for some public sector workers. While these additional expenditures will be funded out of current budgets, the pressure to continue to increase spending in the coming years is likely to remain high, in particular on health care and the public sector wage bill.’

These battles are being fought by the day. Extending the help to buy equity loan scheme does not represent a big cost to government. However, the planned reforms to university tuition fees – freezing the maximum at £9,250 per year and increasing the salary level at which repayments must start from £21,000 to £25,000 – will cost some billions by the end of the parliament, extending into the future. Both were promised by the prime minister at the start of the Tory conference on 1 October.

The Treasury has already signalled that there is room for manoeuvre on public sector pay, with increases above the 1% cap for police officers and prison workers, while recognising the need for ‘flexibility’ in its letter to the pay review body for teachers. Public sector unions have, however, reacted negatively to the government’s announcements, saying bigger increases in public sector pay are justified on the grounds of cost of living, not just in response to specific shortages of workers, or linked to productivity and efficiency. Professor Ted Baker, the new chief inspector of hospitals, has warned that the NHS in its present form is not fit for the 21st century.

On working-age benefits, where the four-year freeze in cash terms inherited by Philip Hammond has been maintained, the strains are growing. They are accompanied by renewed concerns over the rollout of universal credit. The benefits freeze is a particular problem because it was put in place at a time when inflation was expected to remain very low.

For the chancellor, the pressure to loosen up on public spending is real. Many Tory MPs want a low tax economy to compete more effectively in a post-Brexit world, but they also want their postbag of complaints from constituents about public spending to get smaller. They also know that the ‘austerity party’ label for the Conservatives is toxic.

But, despite the improvement in the public finances – analysts now expect this year’s borrowing to come in closer to £50bn than the £58bn the Office for Budget Responsibility predicted in March – there is no sense in the Treasury that the guard can be safely dropped. The OBR is taking a gloomier view on productivity and the medium-term public finances so the search for revenue raisers to match any politically determined increase in spending is intense. That includes some of the usual suspects, most notably further measures to cut down on tax avoidance.

There is other familiar territory. It would be a brave chancellor who, having been forced to scrap his planned increase in class 4 NICs in March, returned to the scene of the crime eight months later. The March U-turn was because the increase was in breach of the 2015 Tory manifesto. The pledge was excluded from the party’s 2017 manifesto, removing that political constraint. But there would still be a lot of opposition from Tory MPs.

Less controversial but still difficult would be an increase in fuel duty, after a freeze stretching back for years. One obvious way of doing this would be to maintain the freeze on petrol but increase the duty on diesel, thus sending clear price and environmental signals. Plenty of white van men (and women) drive diesels, though. The other suggestion doing the rounds, because it always does, is action on pension tax relief. This chancellor, like all his predecessors, is concerned that so much of the relief goes to higher earners. But, like his predecessors, he might find it hard to do much about it.

The broad message remains. Hammond knows he is under pressure to boost public spending. He is determined that any largesse is matched by additional revenue. We will know on 22 November whether he has succeeded.