Budget 2017 podcast: Fiscal Phil's housing gamble
Philip Hammond delivered his autumn Budget on Wednesday. Was it enough to placate his Conservative critics? What do the dire growth forecasts suggest for the years ahead? And is the UK ready for Brexit? With Rupert Harrison of BlackRock and Torsten Bell of the Resolution Foundation.
Presented by Sebastian Payne. Produced by Madison Darbyshire and Martin Stabe.
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Welcome to a budget special of FT Politics, The Financial Times' podcast on British politics. I'm Sebastian Payne, and today we are discussing Philip Hammond's autumn budget. The chancellor had a difficult hand to play with growth's forecasts slashed, productivity levels continuing to decline, and demands for more money on health service unmet. But fiscal Phil seems to do it pretty well. I'm delighted to be joined by Rupert Harrison, portfolio manager at BlackRock and a former chief of staff to George Osborne, plus Torsten Bell, who's head of The Resolution Foundation and PFC director of policy for the Labour Party. Thank you both for joining.
So to begin, there were two stand out announcements in Mr. Hammond's budget. The first were growth forecasts, which have been revised out, reaching as low as 1.3% in 2019. The second was a gamble to tackle some of the problems in the UK's housing market, with stamp duty abolished first-time buyers. Torsten Bell, just to begin, what did you make of the budget overall here? The expectations were pretty low. This was meant to be boring and dry. And it was relatively dry, but with this rabbit out the hat you so often get.
Well, the big picture of the budget is that the office for budget responsibility has punched the chancellor in the face with very, very [INAUDIBLE] downgrades to their economic and their public finance forecasts. And the chancellor has chosen to largely take her on the chin, and actually to choose to borrow a bit extra. Some of that is, as you say, for a big package of measures on housing. And the focus on housing is very welcome.
And Rupert Harrison, what did you make of the budget? I think the budget will probably be a success in the sense that we'll probably be talking about something else in a couple of days time. And I think that that was probably the key test after the previous budget unravelled. He had to backtrack on his main tax announcement. There's a lot of pressure on the government in the run up to Brexit negotiations. And as Torsten says, he delivered some bad news on the economy, which we will have to live with. But he probably did enough in terms of a little bit more money here for public services at a very small right bit at the end in terms of stamp duty for first-time buyers. But I can't see anything in there that's probably going to trip him up.
So let's talk about these growth forecasts, Torsten, because the OBR has a great history of getting growth forecast wrong here. And you might say, well, they've got it wrong in their forecast before. Are these ones going to be any more accurate? How much should we believe them?
All forecasts are wrong. That's the nature of the beast. What the OBR has decided is that they don't want to be as wrong in terms of slow productivity growth as they have been over the previous seven years. That's basically the big picture. They've decided it's the same decision the Bank of England took about a month ago, and they're both now thinking that saying that the UK economy, the speed limit at which the UK economy can sustainably grow is much lower than it was pre-crisis, and that's here to stay, even if it does pick up slightly from the current non-existent levels.
Yes. There's only so long you can carry on forecasting that productivity growth is going to bounce back before you have to acknowledge, well, maybe it won't. And let's all hope that the timing is exactly wrong and that finally when they have downgraded their forecast, maybe now we will start to see some productivity growth. But it's a big downgrade. They are still forecasting an acceleration in productivity. So let's be clear. They basically split the difference between what they thought previously and what's been happening for the last seven years. So they're still expecting some improvement, just half as much as they were before.
And the impact is big. That's going to cost us in tax receipts, $20 billion pounds by the end of the period. And incomes will be lower, and all of the associated problems that come from the productivity growth. So it's a big deal. And Philip Hammond has responded by setting out more measures from government on improving productivity. But this all takes time and with very long lags.
It's worth saying, actually, that although a lot of the focus on budget day, and the run in to budget is on the public finances. And those figures are very bad, that at 26 billion, the productivity here is taken off the [INAUDIBLE] chancellor. But actually, in some ways, it's worse for the family finances. The forecast details shows family finances being about-- incomes being 500 pounds a year lower than they were expected to back in March. And then there was a Brexit downgrade before that. So this is not good news for the family finances, even if you think Phil's done better than expected.
One interesting thing about this productivity forecast is that it now looks very like-- indeed, the growth forecast looks very like the treasury's long term forecast before the Brexit referendum. And I think one of the interesting things is how much of this productivity downgrade is just long term slow productivity growth and how much is due to Brexit.
That was the question I was going to come on to, that a lot of people will look at this budget, and particular with the 3 billion pounds the chancellor said is going to be put aside for Brexit and say how much of this is just the health of the UK economy, and how much this has been the impact of the vote to leave the EU, which obviously didn't have an immediate shock to the state of the economy, but seemed to have a more subtle and longer tail effect, Torsten.
Well, the productivity downgrade in this fiscal event is bigger than the OBR's initial view about the effect of Brexit. And I think it probably is fair to say that although the outcome here looks quite similar to what the treasury forecast for the Brexit referendum is, that the project fear a risk of a outcome actually, I think what's going on for the OBR is that looking back over what's actually happened to the UK economy well before the Brexit referendum, which is a productivity growth is basically zero since the financial crisis, and are saying, with or without Brexit, that's pretty rubbish, and it looks like it's going to continue.
Now, let's look at the state of the public finances over, Rupert, because obviously, debt continues to climb, and Philip Hammond said that it will reach a peak this year, which is a nice way of simply saying that we've still got a huge deficit, and it's going to take us quite a few years to actually close it there. Do you still think that that target of by the middle of the next time of getting the deficit goals is achievable because it's been pushed back so many times, as you saw during your time in the treasury?
Indeed, the big picture is we had a deficit of more than 10% of our GDP. That was, I think, and I still think was a threat to economic stability in the UK, something that had to be dealt with. It's now down at 3%, below 3% of GDP. And I think it says something that Philip Hammond can receive a downgrade to his public finance forecast. He can respond to that with a modest fiscal loosening, spending even more money. And yet still, the deficit forecast don't look too bad. So we've got our public sector deficit that is forecast to carry on. Falling is a share of GDP for about 2% down to 1% of GDP. That's quite low by historical standards.
So in the short term, there's no crisis. And he had that wriggle room. I think the issue is, as you say, we've got high levels of debt. We've got a large banking system. We're very dependent on capital inflows. At some point, we are going to have to get serious about getting that level of debt down. Now is probably not the time to double down on that given the Brexit uncertainty. But I think it leaves that question unanswered.
When we look at what's going on in public finances, what we've really decided to do as a nation is learn to live with 80% debt to GDP in a way that we learned to live with 40% debt to GDP before the crisis. And if you look at the numbers, there's no serious attempt to get below that 80% figure in the medium term. So the world in which we were looking to have sharply downward pointing deadlines in our forecast has basically passed. And as Rupert says, that's passed because of Brexit.
And it's also just so politically difficult that it seems that chancellors just don't seem to, for whatever reasons, to make those huge cuts that would be required. Do you think that matters at all to have debt at that level, Torsten?
Well, the background to what you say is obviously they don't want to do that in a world where they have a tiny majority. And it's very hard to pass tax rises. And if you wanted to make inroads into debt, my view is any real chance that in this position, now, would probably be looking to do that via tax rises rather than spending cuts. In a world where you can't legislate for that, you learn to live with high debt, and you pray you don't get a big recession coming along and whacking that debt level up by 10%.
I think that's the precise issue, is that this budget, and this path of the public finances is fine as long as conditions are relatively benign, which they may well be. After a big financial crisis, you can have a very long slow recovery that grinds on for years and years. And let's hope that is the case. But the big test is if you do get a slowdown, and if public finances deteriorate, and people are going to need to see how we're going to respond to that, how we're going to stop debt getting out of control, when you go to parliament, essentially no majority of those difficult decisions, that would be the big test for the UK. Let's hope we don't face it before we have a chance to change the parliamentary arithmetic.
So let's talk about the big retail [INAUDIBLE], which is all about housing. And I think most conservatives now acknowledge they've got any chance of winning the next general election, they have to do something about the UK'S housing market. And with the average first-time buyer now at 32, and the average first-house price in London pushing well above 400,000, it is clearly a big issue for them. And so Philip Hammond really seemed to throw the kitchen sink at this issue in hoping that some of the stuff would actually stick and begin to ease up the pressure on the market here. Torsten, what did you make of all the measures with the most notable one being the abolition of stamp duty for first-time properties under 300,000, and if you are above 300,000, the first 300,000.
So the overall focus on housing is spot on, and any politician of any party right now should be focusing on that, and the breadth of the focus covering lots of different elements of supply, and with future promises are coming back to look at compulsory purchase orders and other areas is very welcome. The slight downside is for all the breadth of that rhetoric, all the money in practise is being spent on this stamp duty cut. That's by far the largest cost measure. And that is, in the end, a measure affecting demand that will push up house, the OBR says by an average of 0.3%. And actually, no budget line is spending that much money on extra supply.
And if we look in the weeds of the budget document, you'll see that the spending on what's called housing infrastructure fund, which is a good thing to put extra cash into, is in italics. And it is in italics because it's beyond the spending review coming out of non-existent budgets. And so none of that's coming in right now. And that's the big spend. That's two billion quid that's coming for extra housing supply, and it's not coming now.
No, I agree that housing is clearly a big political issue, and house prices are a big political issue. I think the reality is that high house prices are largely a function of very low interest rates. It's the same for other asset prices, the stock market, equivalently. And those low interest rates may or may not be there to stay. They probably are here to stay for some time. Anything that any politician does to increase housing supply in the short term is not really going to impact those high house prices anytime soon.
So I think the politics in this is all about being seen to act, to take on vested interests, make a change that may make a fluid difference at the margin. But we shouldn't expect that the outcome is going to be substantially lower house prices for young people trying to buy a home anytime soon. The measures themselves are all good in the sensible that they're mainly incremental. I think if we are going to get in get serious about this, we need to start thinking about building a significant number of new towns, garden cities, getting into compulsory purchase, getting into further planning reform. He's nibbling at the edges of those big issues, and I'm sure there will be more to come.
And one of the important things to remember about housing as a political issue is even talks about it as if it's a retail giveaway to a few young people. But for the reasons Rupert sets out, you're never going to be able to give enough to make it into a proper retail offer. What it's really about politics is saying I get that this is a huge challenge facing the country, and we as politicians are opt to trying to address. That older people care about that as much as young people. And that is why it needs to focus on supply and not pretending he's got 10 pounds 50 people today.
Absolutely, and in terms of the very, very short term, the top of the bulletins at the moment is stamp duty cut for first-time buyers. I think Philip Hammond and his cabinet colleagues were pretty happy with that. If that remains the headlines by tomorrow morning, then that will be seen as a short-term success.
So this was the problem with Philip Hammond's budget earlier in the year, Rupert, that when you looked at it, there were no real clear retail offers, and it all unravelled over the changes to national insurance contributions. And it's obviously maybe a little bit early to say this now, but generally, based on what conservative MPs are saying, how it was received in the chamber, there doesn't need to be anything too dangerous that could come and backfire. But I'm guessing we'll have to wait and see over the next few days.
Yeah, I'm a little nervous to make a confident pronouncement now two hours after he sat down that there's nothing in there that is going to unravel. But I have to say in March, when he set out the national insurance tax rise, you just knew immediately this was going to be a massive problem. There was nothing today like that. He's really played it very cautious on the anti-avoidance measures, on small tax rises, for example, polluting diesel cars. Looks to me like all of these should be fine, but those may be famous last words.
And Torsten, one the other striking announcements was on universal credits. So this is the big welfare reform programme. It's been under a lot of criticism from labour MPs who feel that it's unfair and it's this six-week wait period, right before you make your claim and actually get the money, has been since pretty pernicious anyway. There was 1.5 billion in the budget towards universal credit to reduce that by a week and do a whole host of measures to try and basically make it fair. I don't think Philip Hammond really had much choice because there was it he had a toy rebellion on his hands. And with Christmas coming, the conservatives don't want headlines about universal credit backfiring. Do you think he's done enough here to make universal credit work better?
No, he's done enough in the short term to remove the political pressure, which as you say, has been on this six-week wait issue for new people coming on and claiming universal credit for the first time. He's reduced that by a week, and he's also allowed people to claim bigger advances. And actually, the thing that people haven't noticed, he made a good move, which is to make it smoother. You transition from housing benefit to the housing element of universal credit.
There's a very good idea because it avoids pointless areas that we don't need to have. That said, he's still pressing ahead with the thing that is going to cause universal credit problems in the near term, which is a 3 billion pounds worth of cuts alongside a benefit freeze that mean the takeaway from young working families in particular is very significant across the rest of this parliament. That might have been OK, but as I said before, you've got a very big living standard squeeze coming from these revised forecasts for productivity. Those two combined is a pretty tough pill to swallow for low-income families.
I'm not sure I agree. I think he probably has done enough because the problem was he was going to lose votes in The House of Commons. He was losing his own colleagues on the conservative benches. And I think these tweaks to make it work better in terms of implementation will satisfy that. I think that removing the generosity, reducing the generosity of the benefit and the benefit freeze, these are very controversial issues that affect people very deeply. But I can't see the government losing votes in the House of Commons on that. And I think the great thing is if you can remove the impediments on implementation, we shouldn't lose sight of the fact this is still a transformative reform, and the evidence so far is it's getting people into work and is generally a good thing that still has cross-party support, which is all too rare these days.
And very briefly, just to rattle through the last final few measure, Torsten, on health care, there was some extra money put forth to the NHS, but not quite as much as Simon Stevens, who runs NHS England was looking for.
No, and on the NHS, I think really what the chancellor has done is said, come back to me and tell me how much cash you need next year for the pay increase, as he's lifting the public sector pay gap of 1%. And in the end, that is a huge bill for the NHS. A lot of the NHS spending is staff spending. He said there's a bit of cash next year to deal with some other pressures. And come and see me later when you've worked out how much extra you're going to pay nurses.
And curiously, nothing on social [INAUDIBLE]. Now we heard in June's election that this was a generation-defining issue that was going to need really big reforms. And there's not really a single mention of it.
Yeah, so I think the issue on it is which generation was it defining for? So it turns out not this one. In the generation of conservative politicians of Philip Hammond and Theresa May's age have probably decided that they're not going back any of that in the near future. And that is obviously a big problem. And the policy measure they set out obviously in the conservative manifesto were a political turkey. But they're right to address the issue is a huge problem, and they're right probably to say that working age households can't be asked to pay for that. And so we do need to look towards old generations and homeowners in particular.
And we also had freezes on fuel and alcohol tax as well.
Yeah. we had some goodies. He was sprinkling around the goodies, a little bit more spending on health. Alcohol is always a good punch line in the House of Commons, gets you some good headlines. Fuel duty, this has now been a very, very expensive policy delivered by chancellors over many years now. Yeah, I think we've just got to the point with fuel duty where you know the limits of tolerance for taxation, I think it's a very interesting question about whether any chancellor now can ever deliver an inflation increase in fuel duty. And if they can't, then that is a pretty big structural hole in the public finances, even with oil prices now much lower than they were several years ago. But I think that's one we'll be hearing about again.
And we also had a big focus on science and technology, Torsten. And I think this is, again, Philip Hammond trying to look forward beyond Brexit, that obviously he's got this [INAUDIBLE] reputation as being very down on Brexit, and not being optimistic about Britain's chances after leaving the EU. But this focus on investing in the Oxford, Cambridge, Milton, Keynes, [INAUDIBLE], lots of focus on mathematics and computer science are areas where clearly they'd love to see growth, because it's somewhere that they think Britain can have a competitive advantage regardless of what kind of deal we get with the EU, which obviously overhangs everything.
And there are lots of good rhetoric on that. And that simple message of the first five minutes of the chancellor's speech was the future good, the past bad. And most people would agree with that in some form or other. Really, if you look at the detail of what we're saying, the increase in spending on R&D is for the middle of the next decade heading towards 2030, it is a lot of money. And that money will have to come from somewhere. And really, it means bigger cuts to other departmental public service budgets. But those are all problems for probably two or three chancellor's times.
So there we have it. And to finalise, I want to ask Rupert and Torsten to mark this budget to give us out of 10 what you think it is. Rupert?
In terms of memorability, probably three out of 10. In terms of doing what we needed to, nine out of 10.
Well, if we're allowed two, then I'll go for one out of 10 in terms of how awful the substance is both for the chancellor and for Britain in terms of the grimness of the forecasts. But he dealt with it probably about as well as he could, particular on the politics. So let's give him eight for that.
Well, thumbs p for Philip Hammond then. That's it for our budget special episode of FT Politics.
Many thanks to Rupert and Torsten for joining us on a busy day. We'll be back on Friday for our regular weekly discussion. FT Politics was produced by Madison Darbyshire and Martin Starbar. Until next time, thanks for listening.