Chancellors have always had an interesting relationship with numbers. Gordon Brown had three great tricks. His first was just to pretend numbers he didn’t like simply didn’t exist. This trick he learnt early on when his own documents showed quite clearly that the tax burden was rising, but he would simply refuse to acknowledge that that was the case. His second was to cumulate numbers over many years so, £100 this year plus another £100 next year and another £100 the year after makes, of course, a £600 increase. (Yes, you read that right, £600. Work it out). Finally, he could just redefine things. He didn’t increase borrowing, it was investment he was doing.
Now it may merely have been press speculation but some of the descriptions of what we might see in the budget tomorrow falls into this curious category of describing numbers in novel ways. The weekend headlines suggested that the Treasury had “set aside” £60 billion as some form of Brexit “war chest”. That sounds most reassuring. Except that this is a rather odd definition of “set aside”, to put it mildly.
If I were to tell you that I had set aside some money to pay for my children’s university education or to see me through retirement, you would probably take me to mean that I’d put some actual money into an actual savings account. On the same basis you might think that Mr Hammond was planning to put some actual money aside. A more nuanced understanding might lead you to think that since June 23 last year he had found ways to reduce borrowing over the next few years by £60 billion.
Well, no. Obviously, given that we are running a deficit of about £60 billion a year and have a debt of about £1.7 trillion, clearly we don’t have any money actually set aside. Nor is borrowing set to fall relative to the pre-referendum forecasts. Rather the reverse in fact. Indeed, it is worth noting that the current borrowing plans look remarkably similar to those outlined by Labour’s Ed Balls before the last general election (in fact they imply more borrowing than that planned by Mr Balls), much more so than they look like what we were promised by the Conservatives at that time.
So in what sense might there be a war chest of £60 billion, or indeed of any other amount? Well, unlike his predecessor, Mr Osborne, who wanted to get us to budget balance from 2019-20 onwards, Mr Hammond has said he is happy to be borrowing up to 2 per cent of national income, about £45 billion, in 2020-21. We are on track to borrow less than that. Ergo we have a war chest. And because the borrowing forecasts to be published tomorrow will probably be a little better than those published in the autumn (though worse than those from last March) we have an even bigger war chest than we thought.
So we could borrow quite a bit more, perhaps £25 billion more, than currently planned and still meet Mr Hammond’s self-imposed fiscal target. Whether there is any way of turning that £25 billion number into £60 billion, I don’t know. But the point is there is no war chest, no money set aside.
What is actually happening here is that Mr Hammond has decided that he is willing to borrow more than planned if that proves necessary. This quite likely makes sense. If we do suffer a hit to the economy as a result of leaving the EU, or preparing to leave it, we should probably not respond with immediate additional spending cuts or tax rises. The chancellor was wise to provide himself with more headroom. But that it is all he’s done.
In any case this all comes with two big caveats.
The first is just that we shouldn’t forget that austerity has a fair way to run. The deficit is falling over the next few years partly because the tax burden is rising to its highest level since the mid 1980s and partly because there are more spending cuts to come. In fact, the pace of cuts to day-to-day spending on public services is set to accelerate over the next couple of years, after only modest overall cuts since 2013. In addition, some pretty substantial additional cuts to welfare benefits are due this April, cuts whose effect will cumulate over the next few years as more and more people are affected by them.
Second, Mr Hammond hasn’t entirely abandoned his predecessor’s desire for a balanced budget. Instead of wanting to get there by the end of this parliament though, he wants to get there by the end of the next parliament. That won’t be easy even if, as currently planned, the deficit is down to £20 billion in 2020. The population is growing and ageing, putting additional pressure on already stretched health and social care spending. Elsewhere the pent-up pressures after a decade of austerity will be immense. If instead we need to use the “Brexit war chest” — ie borrow more than planned in 2020 — then the task of getting to budget balance will be even harder.
So look out for the slippery use of numbers tomorrow. Improvements in forecasts for the economy and public finances since November will be dwelt upon at length. The fact that they remain worse than they were a year ago will be studiously ignored. That we are living through the worst decade of growth in household incomes in living memory will get nary a mention. And the demographic challenges, which will require hard choices after 2020, will be considered much too distant to contemplate just yet.
This article was first published by The Times and is reproduced here in full with permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist