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Expert View

Chancellor desperate to spin economic damage of Brexit

by Vicky Pryce | 13.03.2019

Vicky Pryce is an economist and commentator and former joint head of the UK Government Economic Service.

Philip Hammond was brimming with positivity in his spring statement today. But the reality is an uphill struggle with Brexit uncertainty continuing to choke the economy. Meanwhile the “deal dividend” he keeps promising if MPs ever back the government’s withdrawal agreement is a mirage, and dwarfed by the dividend we’d get from staying in the EU.

Hammond glossed over the bad news from the Office for Budget Responsibility (OBR), which downgraded its economic growth forecast for 2019 from 1.6% to 1.2%.

Instead the chancellor clung to the positives. Partly because employment has been higher than earlier OBR forecasts, the deficit-to-GDP ratio in 2018/19 is now likely to be the lowest since the financial crisis and lower than at any time since 2001.

But that still doesn’t give Hammond the surplus that his predecessor George Osborne had hoped for this year. The chancellor boasted of the £150 billion in new spending commitments the government has made since 2016: for the NHS, defence budget, part-reversal of the universal credit cuts, more police officers. Specifically related to Brexit, we’ve seen billions put aside for Brexit preparation, increases in civil servants, a billion pounds to the DUP, May’s £1.6 billion “bribe” over seven years for disadvantaged Labour towns. So it is difficult to see how much Hammond really will have to play with.

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The chancellor clearly wants to come good on his promise in October to end austerity. For that he will need higher growth than the OBR is suggesting in their revised but lower forecasts for an orderly EU exit. Even then it will need more government borrowing. And, despite strong economic growth in January, the three-month rate was still showing only 0.2% growth and the latest PMI indices for services and manufacturing suggest stagnation once again.

Then there is the uncertainty. His government’s can-kicking tactics have left Hammond in the dark over what Brexit, if any, there will be.

Much hinges on the markets’ reaction to the votes today and tomorrow. If they feel the risk of a no-deal Brexit has diminished, then markets will be relieved. But that impact may only be minor given that, until last week at any rate, the market was pricing in just a 10% probability of “no deal” pushing the pound up.

What of Hammond’s “deal dividend”? This is only a windfall when compared to the chaos of no deal. Against a backdrop of global slowdown it’s unlikely to be very impressive. And even an “orderly” exit still won’t bring certainty on our final trading relationship with the EU or rest of the world. Business investment, which fell for four quarters last year, is unlikely to return in a hurry. There has also been a lot of stockpiling in preparation for “no deal”, and in the short term unwinding this will be bad for growth.

What Hammond didn’t say was that all forecasts suggest growth would pick up much faster – both in the short and long term – if we had no Brexit at all. Don’t forget, the government’s own analysis shows May’s deal would leave us £100 billion poorer than we would have been each year by 2030. The real long-term dividend is to be found in staying in the EU, and a People’s Vote is the democratic way get there.

Edited by Luke Lythgoe