Britain's Budget Is an Impossible Balancing Act
Pity Philip Hammond, the U.K.'s chancellor of the exchequer. His budget announcement today has to contend not just with the long-term fiscal implications of sluggish growth in productivity -- a nagging issue for the British economy -- but also with the government's lack of a parliamentary majority and the enormous uncertainty surrounding Brexit.
These conditions demand an exacting balance of discipline and flexibility. Despite its political weakness, the government needs to affirm its commitment to sound budget control: Austerity is still necessary. At the same time, Hammond should acknowledge the uncertainties, and show that budget policy can adapt if need be.
Over the past six months, despite a weakening economy, the budget numbers have turned out a bit better than expected. Even so, the medium-term outlook remains poor. Sluggish growth in productivity looks set to continue. If it does, this will put downward pressure on tax revenues. Without faster medium-term growth, the government is unlikely to achieve its stated goals of eliminating the structural budget deficit and substantially reducing public debt by the middle of the next decade.
Right now, unfortunately, looser fiscal policy won't help. Lack of demand is no longer the problem: Unemployment is low and the Bank of England is cautiously tightening monetary policy. What's worse, more spending on public-sector wages -- an all-too-likely possibility -- would do nothing for growth.
For the most part, Hammond should try to hold the line on fiscal discipline. Britain's public debt, at roughly 90 percent of output, needs to come down over time. Until it does, there's no room for tax cuts, and continued restraint on current public spending will be needed to enable valuable public investment in the future.
Yet the chancellor should also explain that the Brexit challenge makes attachment to specific timetables risky. With Brexit looming, the outlook for the U.K. economy has never been so uncertain -- and in budget policy there's a difference between rectitude and rigidity.
An orderly Brexit with a smooth transition to a close economic partnership with the EU would make fiscal consolidation easier. A so-called cliff-edge Brexit, imposing enormous costs on British industry, would be a very different matter -- demanding greater up-front outlays with correspondingly severe tightening later. The direct impact of the Brexit settlement on Britain's fiscal outlook is a huge unknown in its own right.
Confident fiscal planning is indeed impossible under these circumstances, and Hammond shouldn't try to pretend otherwise. But one of the main values of budget discipline is that it leaves room to respond to unknowns. This ought to be the chancellor's message. His budget should be conservative fiscally yet show a readiness to spend -- if, but not before, the need arises.
--Editors: Clive Crook, Michael Newman
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