LONDON — To put it lightly, Prime Minister Theresa May’s government is between a rock and a hard place.
The Autumn Statement exposed an economic plan that is built on conflicting missions: trying to move away from the austerity agenda of the Cameron-era on one hand, while attempting to safeguard the economy from the seeming inevitable damage of Brexit on the other.
This impossible juggling act became clear following some of the startling headline figures the chancellor of the exchequer delivered to fellow MPs on Wednesday afternoon (or “challenging” as he described them):
- The Office for Budget Responsibility slashed its 5-year growth forecast by 2.4% due to Brexit.
- Meanwhile, the national debt is projected to be a huge 90.2% of GDP by 2019.
- David Cameron’s promise to balance the books in this parliament has also been abandoned and instead pushed back until beyond 2020.
The Tory plan from 2010 until now just has not worked out.
Yet, faced with soaring debt and a period of uncertainty resulting from Britain’s exit from the EU, the government is set to take borrowing to levels that Tories have long lambasted Labour for. Hammond intends to borrow an additional accumulative sum of £161 billion by the year 2020/21, with £68 billion being borrowed this year alone.
Here is the chart:
Here lies the underlying problem for the Tory government. It is trying to keep promises made in the past and at the same time address the looming realities of the future.
Hammond promised to “scale back” austerity when he succeeded George Osborne earlier this year, based on a “new phase” of fiscal policy that would be markedly different from the austerity agenda of his predecessors.
True to this, at least to an extent, Hammond said on Wednesday that corporation tax would be cut to 17% by 2020 and promised to create a £23 billion investment fund for areas like transport and infrastructure.
But all these promises are going to come at a massive cost at a time when Brexit threatens to batter Britain’s economy.
During Hammond’s opening remarks, he once again delivered the assertion that Britain is the “fastest growing major economy,” in the world, but warned that the decision to leave the EU makes it more important than ever to address the weaknesses present in the British economy.
The annual Global Wealth Report said this week that nationwide household wealth has plummeted £1.2 trillion as a direct result of Britain’s vote to leave the EU. Sterling has fallen around 15% since the historic vote.
Growth is set to slow, and national debt pile up to staggering heights.
Yet, despite this clear tension at the heart of the Tory plan, May and Hammond remain far ahead of Jeremy Corbyn and John McDonnell when it comes to economic competence. Just 18% of Brits trust the Labour leadership to handle public finances according to an Opinium poll publish this week, while 44% who trust the government.
It is clear that the government has the backing of the public to steer Britain’s economy into calmer waters, but whether it has the plan is a totally different question.
Osborne forced Britain into an era austerity that was brutal for some but it did lead the country to an economic recovery, growth, and record low unemployment levels. Now Brexit is set to undo all of that. Especially since May has still not triggered Article 50, and thereby starting the 2-year negotiation process for the UK to leave the EU, uncertainty over what a Brexit is going to look like is already wrecking havoc across some markets.
In fact, the latest exchange between Britain’s Brexit officials and those from the EU do not seem to be going well.
Brexit is also set to blow a hole in Britain’s finances but Hammond’s announcement suggests he is yet to work out a way to fill it.
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