When Philip Hammond recently delivered his Autumn Statement, we got the first real glimpse of how his Chancellorship will compare to that of his predecessor, George Osborne.
Of course there are the differences in background: Hammond was educated at a comprehensive school and had a 20-year business career prior to entering Parliament; Osborne went to public school and worked for John Major and William Hague before becoming an MP at age 30. Hammond also has a reputation as one of the Cabinet’s more understated, less flashy Ministers, in contrast to Osborne’s political showmanship. But what of the two men’s approaches to the economy?
Hammond’s most obvious departure from the Osborne era came when he abandoned the Conservative Party’s pledge to eliminate the deficit by 2020. In the Autumn Statement, Hammond ripped up Osborne’s fiscal rules and replaced them with three new targets that the Office for Budget Responsibility described as ‘much less constraining than the existing ones’.
This is certainly a dramatic change of policy, but it is due much more to Britain’s new economic reality – especially after the vote to leave the European Union – than to a difference of beliefs between the two Chancellors. After all, George Osborne long ago cast aside his own target of having debt falling as a percentage of GDP by 2015-16 when economic growth did not recover as quickly as expected. After the EU referendum, he also indicated that he no longer believed eliminating the deficit by 2020 was a realistic goal.
So what Hammond has done to the fiscal rules is very similar to what Osborne would probably have done in his place. It does mean, however, that the tone of his Chancellorship will be very different to his predecessor’s. Whereas Osborne took every opportunity to boast about how far he’d brought the deficit down and reiterate the need to cut it further, Hammond will focus less heavily on the topic – if only because there’s unlikely to be much good news on that front in the near future.
Even as he championed deficit reduction, Osborne prioritised tax cuts for both businesses and workers. He cut Corporation Tax from 28% to 20%, and planned to reduce it to 17% by 2020. He also raised the tax-free Personal Allowance from £6,475 to £11,000, and promised to increase it to £12,500 by 2020. Despite the challenging public finances he has inherited, Hammond is sticking to Osborne’s trajectory for both of these taxes. He’s not going as far as Osborne might have, though.
After the referendum, the former Chancellor suggested that he would cut Corporation Tax further, to 15%, as a way of demonstrating that Britain was ‘open for business’. Hammond has rejected that idea. On Income Tax, Osborne had promised that it would rise in line with the National Minimum Wage from 2020 onwards, but Hammond has now decided it will go up only in line with inflation.
On another big tax – Fuel Duty – Hammond seems to be following Osborne’s lead so far. Osborne cut the rate to 57.95 pence per litre in his second Budget, and froze it there in every Budget and Autumn Statement thereafter. Hammond did the same in his first Autumn Statement, freezing it at 57.95p until April 2018.
But it’s too early to tell if Hammond will make low Fuel Duty as much of a priority as Osborne did. His decision last week came after months of rising pump prices. What will he do if they begin to fall? Osborne demonstrated his commitment to the Fuel Duty freeze in March this year, when he extended it despite relatively low petrol prices. Would Hammond do the same in a similar situation? We don’t yet know.
And what about the other main theme of the Autumn Statement: infrastructure? The story here is a little complicated, mainly because Osborne’s own attitude swung from austerity to largesse – and back again.
When he first entered the Treasury, Osborne essentially continued with the previous Labour Government’s plans to cut investment by 60% between 2010 and 2015. By 2013, though, a combination of weaker growth and his Liberal Democrat coalition partners convinced him to change course and commit £100 billion to infrastructure projects between 2015 and 2020. Osborne had come to see the potential of infrastructure spending to boost economic growth, but he only intended it to be a temporary stimulus and set out plans to cut it again over the course of this Parliament.
Hammond, by contrast, sees infrastructure as a key component of his economic plans for the long-term. He has reversed Osborne’s plans to cut Government investment in this Parliament, and instead plans to increase it significantly in 2020-21. In a letter to the National Infrastructure Commission, the new Chancellor has asked it to recommend projects on the assumption that the Government will invest between 1.0% and 1.2% of GDP in economic infrastructure every year from 2020 to 2050. That’s quite a vision, given that the figure for this year is just 0.8%.
So, on deficit reduction, taxes and infrastructure, Hammond is certainly not taking the same path as his predecessor, but nor does he represent as radical a departure as the headlines might suggest. After all, he did spend nearly three-and-a-half years as Osborne’s deputy when the Conservatives were in opposition. It’s hardly surprising that the two men share similar views on many issues.
Where there’s a bigger difference between the two Chancellors, though, is in the politics of it all. Osborne, like Gordon Brown before him, was a very political Chancellor. In fact, he combined the role with that of election strategist for the Conservative Party, and his policy decisions were as much about securing a Tory majority as they were about boosting the economy.
While political considerations will of course weigh on Hammond’s mind, he doesn’t straddle the two roles as Osborne did. His decision to replace the combination of spring Budgets and Autumn Statements with just one major fiscal event – an Autumn Budget – and a much smaller statement in the spring is the first major demonstration of this. Osborne would have been reluctant to give up the opportunity for two headline-grabbing turns at the Despatch Box every year, but Hammond appears to have done just that.