‘So, what did we learn from the most anticipated 25-minute speech of the week? ‘Well, maybe Spring has arrived for the public finances after a long cold winter and the fierce freeze in spending may be coming to an end – just not yet.
‘As had been well trailed there were no significant new spending or tax commitments, although there were some important consultations announced, notably on the VAT threshold as well as on ways for taxing the digital multinationals and clamping down on tax evasion through cash transactions.
‘There were however the faintest hints that the Chancellor will respond in the Budget this Autumn to the pressures building for additional spending, particularly in the NHS, and a hint of future tax rises to come.
‘With the deficit now approaching two per cent (from nearly 10 per cent at the peak of the financial crisis) one could be forgiven for being puzzled by the Chancellor’s iron determination to resist overwhelming political pressure. A two per cent deficit would, in most developed economies and in all recent history, be regarded as modest with the government achieving a good balance on current spending – if not investment spending. So why no goodies?
‘Underlying the fiscal caution is essentially fear. Both the Treasury and, for that matter, the Bank of England (BoE) alongside monetary authorities all over the world, are concerned about a lack of room for manoeuvre. Whilst at the moment the vigorous actions taken in the wake of the financial crisis prevented a recession potentially turning into a depression, what they also did is exhaust the conventional tools to tackle a downturn. Fiscal balance sheets are stretched and interest rates remain at or around the lowest they've been for centuries. The Treasury and the BoE want to reload the bullets of fiscal and monetary easing in time for the next downturn. The US economy, for example, has now grown for over 100 months and now ranks among the longest upswings in a century. It may carry on for a while yet fuelled by the Trump tax cuts but, sooner or later, the music will stop. When it does Philip Hammond and Mark Carney want to be ready.
‘Sound principles aside there may also be a political calculation. It’s early in the electoral cycle to shower the electorate with goodies. Normally at this stage governments get the bad news out of the way early and wait until later to show the fruits of our collective labours. The electoral clock may, this time, call for earlier action as Brexit and the populism across the world upset decades of crafted political strategy. But not yet.’