Hammond's Budget success and the Irish border conundrum
This week's budget went without a hitch for the May government, but what does the future hold for the economy? And why was Labour's response so poor? Plus, can cooler heads prevail over brokering a new relationship between Northern Ireland and the Irish Republic after Brexit? With Chris Giles, Arthur Beesley and Miranda Green of the Financial Times. Presented by Sebastian Payne. Produced by Madison Darbyshire.
Presented by Sebastian Payne. Produced by Madison Darbyshire. Edited by Trixia Abao.
Welcome to FT Politics, the Financial Times' podcast on British politics. I'm Sebastian Payne, and in this week's episode, we'll be looking back on Philip Hammond's pretty successful budget and the growing tensions over the Irish dimension of Brexit. I'm delighted to be joined by Chris Giles, our economics editor, Ireland correspondent Arthur Beesley, and political commentator Miranda Green. Thank you all for joining.
The stakes were high for Philip Hammond's budget on Wednesday, and to the surprise of much of Westminster, it went off without a hitch. Despite the dire growth predictions for the near future, the chancellor's rabbit out of the hat, an assault on the housing market and slashing stamp duty for first time properties up to 3,000 pounds, seemed to work. Conservative MPs welcomed all the announcements, and it was a rare political success for the May government, not least of all because Labour's response was pretty bad.
Chris Giles, looking back after a couple of days since this budget has settled in. They often have a tendency to unravel once you've looked at the details, say, well, actually, this doesn't stack up, or it's going to target this level of votes. But this one seems to be pretty watertight.
It's watertight in the sense that there hasn't been a political backlash, and that's really because there haven't been any tax increases. So the things that normally go badly wrong is the tax increases. And everyone says, why are you raising tax on these lovely people? Why are you taxing these self-employed strivers or pastie eaters or whatever who are the salt of the Earth? And there were no tax rises. It was only giveaways. Not big ones, but it was only giveaways. And so people generally don't complain so much when things were given away.
Also, expectations were quite well managed. But I don't think people quite realise how bad the economic forecasts are. They are pretty dire. So if they are right, and there's no reason to think they will be obviously too pessimistic, then people are not going to be very happy over the next five years.
We'll come back to those growth forecasts in a moment, but Miranda Green, what was your perception of the budget overall that some people have complained it was too boring? I'm sure they'd be complaining otherwise if it was too exciting. But it struck me it's actually a very Conservative budget with a big C there, because there's quite a lot of tax cuts in there, yet some sprinkling of spending giveaways as well. So in that sense, Philip Hammond seems to have met both wings of his party, keeping the Brexits happy by giving an extra three billion pounds of Brexit preparation, and keeping the vast consensus of Tories happy with those tax cuts.
Well, yes, unlike Philip Hammond's spring budget, which was his first one as chancellor, he got away with it this time. And actually, a boring budget is probably exactly what the Treasury were hoping for in terms of their reaction. And I think you're quite right to bring up this idea that he managed to put together a kind of compromise in terms of the different wings of the Conservative Party. And that actually kind of shows government functioning. It may not be what some people want if they have it for a more radical thrust to the person at the head of the Treasury.
But actually to be able to take on board, for example, what Sajid Javid was saying on needing to move to tackle the housing crisis, he did some of that. He may have well-- we don't quite know-- listen to criticisms of some of the earlier ideas that were floated and then didn't come to pass on tax. And they we're not in the budget in the end, which was very wise given the fuss in the spring over national insurance for the self-employed.
So it functioned. And actually, for a government which has had weeks and weeks of total dysfunction, that in itself is noteworthy. And it's particularly noteworthy if you think that we've had at least six months of the Tory party being on the back foot and terrified of the idea of any election because it would be a Corbyn win. You now see a slightly more confident government from a low base, and actually, a bit of a spotlight on the opposition not doing so well in response.
It's amazing how political fortunes can change because you know, speaking to MPs, they all said what a tight spot Philip Hammond's in, and he does have this reputation of having a bit of a tin ear towards politics. But he managed to get out of it. I'm sure both Downing Street and at the Treasury scoured this thing over and over again to make sure all the numbers added up and that it all hung together.
But Chris, this is the topic you tackled in your column in Friday's papers about growth forecasts here because-- and the OBR has a good history of predicting things that don't often come to pass, but these growth forecasts were pretty dire in that. So first of all, what does this say about the future of the economy? And second of all, should we believe them?
I think, well, let's just go really back to sort of basics. So the OBR says that the economy at the moment is neither running too hot nor too cold. And it secondly says that in the medium term, we can roughly, as the nation, grow at about 1 and 1/2 percent a year. Two years ago, July 2015, it thought it was 2 and 1/2 percent a year. So they have knocked off 40% of what they think the UK economy, how well it can perform in the medium term within two years.
Now I'm not going to get into whether this is Brexit or not, but--
You knew my next question there.
I can come back to that if you want. But just go for what is the difference between 2 and 1/2 percent a year compared with 1 and a 1/2 percent a year mean. Well, 2 and 1/2 percent a year is pretty much what the UK has achieved since the Second World War on average. There's been good and bad periods. That means you can have rising living standards, no increases in taxes, and spend some more money to deal with ageing populations and other things like government that come up against governments.
And when you don't have 1 and a 1/2 percent a year with an ageing population means things will slip. So you will either have worse public services or higher taxes. There is no way around that. So if the OBR are right with 1 and a 1/2 percent a year, it is a miserable future.
And this is a political problem as well, Miranda, because the pressure to ease back on austerity is only going to increase as this Parliament goes forward, because it's been seven years since the conservatives came into power and started slashing public services. And we saw after June's election that the mood of the country seemed to be actually, we've had enough of this, and we want a bit more cash.
But as Chris just said, there isn't much cash now. There's certainly not going to be that much cash, particularly around 2019, where the OBR predicts that growth's only going to be 1.3%. And that's the point at which we are leaving the EU and things will possibly start to hit a crunch point.
I think that is absolutely crucial in terms of the politics, the fact that the background to it is public service situation where it's still going to be crying out for cash. And actually, this might become an issue even in the short term. You know, you've seen the problems that the government has had by underfunding a major welfare change with universal credit. That could actually cause people to be feeling the pinch in a few weeks' time. NHS Chiefs came out immediately after the budget to point out that, actually, you know, the amount of money that was offered by Philip Hammond on Wednesday was not remotely enough.
These problems are going to get worse with every month. And that means the next budget, when it comes, will be even trickier for the government. And it's actually very, I think, interesting to think about that when you are sort of reading the coverage, which says, John McDonnell had a really bad day in reaction to the budget because he was tripping up. That is absolutely true. But in terms of the fundamentals, how is the public going to feel as public services are ground down?
Yeah, so just taking the health service as a whole, there's some money to-- basically papering over the cracks, sticking plaster for the next two years. But that means that money doesn't exist in 2020, '21, just about the time just before the next election. And so you've got a choice as a government. You will either have to pump in some more cash-- yes, they will, there's no question about that-- or you have a real crunch.
And they're not going to have a-- they're not going to allow a real crunch in the NHS, and they're not going to take very big decisions where they're not going to fund certain services that currently exist. So we're going to see worse public finances than the actual, the figures suggest because we know government policy will not be to stick to the current spending plans. There will be more money spent.
And I think it's really interesting, also, if you think about the kind of alternative perspectives that the Labour Party tries to put forward, because parts of it fell apart under scrutiny this week, it's true. But for example, on corporation tax, I mean, you know, some taxes are going to have to go up at some point. Wouldn't you agree, Chris? And I mean, corporation tax is quite low now comparatively. And you know, you might have to see the Conservative chancellor, whether it's Philip Hammond or indeed a successor, taking different decisions on this.
Absolutely. My sense is that this was very much a holding. But it was supposed to be the big budget of the year because the first of a new parliament, first autumn budget. But actually, when they were hit by the big downgrades in the forecast, they said, let's just try and do safety first. If we really need some money, we might well know that better next year. That's the time to scrap the cuts in corporation tax, which are scheduled, which are quite expensive at four, five billion pounds a year. So you get proper money that way.
And we'll keep that in reserve because, you know, things could get quite difficult in the short term sense. We know the long term is just challenging because we've got potentially low growth and an ageing population all coming together at the same time. But there might be some big short term problems because if you just think about the headroom that they've got against their fiscals-- now governments break fiscals all the time so that's not the be all and end all. But if we have any sort of proper downturn because of Brexit, which is absolutely not in the forecast-- the forecast basically assume a very smooth Brexit-- then the public finances in any sort of proper downturn go from being a little bit tight to being horrid very, very quickly.
And you touched on earlier, Miranda, Labour's response to this, because John McDonnell, the Shadow Chancellor, has a very different economic approach to Philip Hammond. It's really so far removed, they're not even on the same planet about how they look at spending and debt and that sort of thing. And he wrote an Op earlier in the FT outlining why he said, you know, it needs to start opening up the spending taps and investing in infrastructure and increasing public sector wages, and all that sort of thing.
But his response was a bit hit and miss this time, mostly miss, actually. The interviews on the day, he was unable names of hedge funds that he claimed backed his nationalisation plan. He was also unable to say how much his extra spending would cost. And this doesn't matter for Labour because in June's general election, they were given the benefit of the doubt by a lot of people, and their plans didn't get as much scrutiny.
And suddenly, this alternative economic strategy start to look quite credible. When you look at the series of responses to this budget, actually, it does give the sense that the Conservatives have sort of, they've regained that sense of we're the calm trustees of the economy, while Labour are the ones who sort of want to blow it up in a way.
Well, Seb, you're absolutely right. And you know, you and I have discussed many times here this idea that the Conservatives have been sacrificing their core brand value, which is supposed to be competence, you know. So this week, with a budget that kind of worked, with an opposition that couldn't answer tough questions on their own proposals, it looked as if, you know, the governing party was beginning to get back some of that allure, which is really fundamental to why people choose to vote Conservative in general elections.
But I think that there's a danger of overstating it, to be honest, because it's quite true that some of McDonnell's answers under pressure were absolutely terrible. I mean, saying that he didn't have the detail on how to pay for things because that's why he had advisors and an iPad is absolutely sort of inadequate in a Shadow Chancellor. But actually, as we've been discussing, the fundamentals really matter. And if you've got a government that can't satisfy people, that it's going to provide for them and provide for the things that they think are the bedrock of the kind of social contract in this country, you've got a real problem on your hands still.
I think if you look at the polling data at the moment, it's very interesting. There's a 19% that everybody's rowing about. This is the 19% of people who say that they would vote Conservative in a general election, even though they don't actually support anything the government is doing or think they're doing it well. That's the people who still think the Tories are more competent. They need to build on that 19% again, and Labour have to convince that 19% that they can be a government that they can trust, even if they don't agree with their aims.
I'm slightly sceptical of the Labour's policies didn't get a huge amount of scrutiny or criticism in the election. I mean, that's all the Conservatives did in June. It's just that I think a lot of people thought, a, we don't like the economic situation so we're going to vote for an opposition party, and b, actually, the world isn't working for me very well at the moment. And so if that continues to be the case, and if we run up to another election where that is the case, and if Brexit doesn't go well, then the Tories are going to be in a huge amount of trouble, whatever, however mad some parts of the Labour Party policies might appear to be.
I think that's very true and the Conservatives, particularly the backbenchers in this new generation of MPs who entered Parliament in 2015 and 2017, are very aware of that, and they sort of see Brexit as something that the older generation will have to sort out-- i.e., those in the cabinet. And they hope at a later date they will be able to move the form and put forward new ideas because they buy into Theresa May's original vision that Brexit is this revolutionary moment for the UK and things do need to be reset. But at the moment, not having a majority makes it quite hard to sort of upturn things, but that doesn't really help you regardless.
So when we went into this budget, Philip Hammond was in a pretty precarious position, Miranda. A lot of people thought that he was up for reshuffle, and there's talk that Theresa May will have a reshuffle after the December summit, assuming that December summit goes well. But I think it's fair to say Philip Hammond is now in a pretty good position, and I think that even though the Brexiters would love to get rid of him and pop Michael Gove in his place, it seems like he's probably going to be there for a bit longer.
Yes, he shored himself up very successfully. And some of these wonderful rumours that are going round about Michael Gove talking up his own credentials.
In economicy words.
Long, economicy words as some of his cabinet colleagues have accused him of using, and try to paint himself as a potential successor to Phil Hammond. It looks as if those hopes have been slightly dashed. And I think also, again, we're back to this sort of idea that the government just has to show the steady hand on the tiller because, you know, the stormy waters of trying to get Brexit done, let alone get it right, means that they really can't afford too much turbulence at the top. So it would be extremely risky move for May to move her Chancellor now or indeed next month.
I mean, the idea that some parts of the cabinet have that the UK economy would be fundamentally different if you had a different Chancellor is just nut. I mean, there's no other way of saying that. There is not a Philip Hammond break on prosperity and growth in Britain. And getting rid of him and putting someone else in their place, the only thing it could do would be to make things more precarious by making the government look as if it didn't know what it was doing.
Tensions over the Irish dimension of Brexit ratcheted up several notches this week with Leo Varadkar suggesting that Ireland could potentially block progress in the talks unless the UK does more to give reassurance there will not be a hard border between Northern Ireland and the Republic of Ireland after Brexit Day. It's a Gordian knot for Theresa May given that she's insisted the UK is exiting the EU customs union and the single market. So how on Earth can she begin to resolve this?
Arthur Beesley, let's just begin with the Irish political dimension that obviously Mr. Varadkar is concerned about his domestic political position, as well as making sure Brexit doesn't harm his economy. What's going on there?
Well, essentially, Leo Varadkar has been Taoiseach for five months. He inherited a minority government, and that is a government that is very, very concerned to avoid anything in Brexit that would undermine the Good Friday Peace Agreement of 1998 that brought an end to the sectarian violence in Northern Ireland. But he's also at the same time very, very concerned to avoid anything that would damage Ireland's very substantial trade with the UK. The bilateral trading relationship between the two islands is worth in the region of $65 billion euro per year. And this is really a lifeblood question for the Irish economy.
So the real issue seems to be here that if the UK does exit the customs union, then it's obvious. How can goods move across the Common Travel Area, which has obviously been there far longer than the Irish and the UK have been members of the EU. But it is a pretty difficult question because the EU doesn't want Northern Ireland or the Irish Republic to become a back door for goods into the UK, and therefore, undermining the single market.
That's absolutely right. I think the hope all along in Dublin was that Theresa May, after the Lancaster House speech many months ago in which she declared that the UK would be leaving both the customs union and internal market, the hope in Dublin was that Theresa May would, in fact, backtrack on that position in the negotiation. And we all know that she then had the unnecessary general election of June, in which she lost her majority, and the sense in Dublin is that that essentially has lessened the scope she has to make any compromises, both within her own party and in the talks with Brussels.
And that, in turn, means that the situation regarding the Irish border is all the more urgent. The Irish question is one of the top three priorities in this divorce stage of the talks that must be unlocked before the trade talks, but Dublin doesn't want anything that would lead to controls on the frontier that would hark back to the kind of security checkpoints that were a feature throughout the very long period of troubles in Northern Ireland.
Because on the customs union, there's not really a way that Northern Ireland could stay in the customs union because you would then be creating a border in the Irish Sea, which would undermine the integrity of the United Kingdom. So realistically-- and the Irish government must know that-- what do you think they want to see from the UK to give the nod to move on from, as you said, the first phase of talks to the second phase of talks, which is all about the future relationship between the UK and the EU?
I think, Sebastian, there are points to be made here. The first is that anything that would-- anything that would mean that Northern Ireland would remain within the customs union while the rest of the UK left the customs union wouldn't really solve the problem that Brexit presents to Dublin, because while you might have comfort regarding the prospect of border crossings and frontiers and checkpoints and customs and all of that, there might be comfort there, but that will do nothing to solve the problem Dublin has with this very important East-West trade.
So I think really the position of Dublin is that by agitating very hard as a matter of political priority to avoid any damage to the peace process, Dublin is hoping that the political solution is just holding out for would in turn colour the solution for the rest of the UK. The bottom line in Dublin is that Dublin would much prefer London to stay in the customs union.
But it doesn't seem particularly likely at the moment that that will happen, you know. And how much is the lack of an administration in Stormont effecting this? Because negotiations between the DUP and Sinn Fein have gone on for quite some time now with continued threats of new election or direct rule from Westminster, and there's still nothing there. And that must be impacting the fact that Dublin isn't able to talk to a government north of the border about this.
I think it's quite an important consideration. I think the reality is that there is no power sharing government in Northern Ireland. As such, the region lacks a formal political voice. But there is another crucial aspect here, and that is that Theresa May, since the election of last June, is wholly reliant on the votes of the Democratic Unionist Party to be able to pass laws in Westminster.
And I think that is actually a crucial aspect here in the discussions between Dublin and London. I think people would say that we've seen Arlene Foster in the last week-- she's the DUP leader-- after talks with Theresa May, come out very heavily criticising Dublin's approach in the talk. So that is certainly a consideration.
And obviously, the DUP have a particularly strong stance against remaining in the customs union. So if Theresa May's government did backtrack and sort of say there's going to be exceptions, Northern Ireland is a special relationship, then that would certainly risk the DUP's role in propping up her government.
But you've got to remember that there was a majority in Northern Ireland to remain. And I think there is a sense that business in Northern Ireland and the farming community standards to lose rather a lot in the Brexit scenario. And I think there is still a hope in Dublin that those kind of concerns would begin to exert themselves in Arlene Foster's dialogue with Theresa May as these talks evolve.
And just to go back to Leo Varadkar for a moment, can you just give us a brief explanation of what's going on with the scandal involving his deputy, and what risk you think there is of this actually, you know, resulting in some new elections in Dublin, which, of course, could impact this whole thing?
Well, I mean, the situation is evolving quite rapidly in Dublin. There has been a political affair, if you like, for a long series of controversies over-policing for many, many years. And those controversies have already led to the departure of two chiefs of police and a justice minister.
Now the current row centres on legal strategy adopted by the former police chief against one of the police whistleblowers at the very centre of this affair. And what transpired late on Monday, after a long series of disclosures, was that the Deputy Prime Minister, a lady called Frances Fitzgerald, knew of nothing to prevent this legal strategy at a time when the case was under investigation in a formal inquiry.
Now the Deputy Prime Minister says there was nothing she could do, it would have been improper for her to intervene, and that she did everything correctly. But the opposition, Fianna Fail Party, which is the largest opposition party, and which is supporting Leo Varadkar's minority government in the same way as the DUP is supporting Theresa May, the Fianna Fail Party has decided now that it has no confidence in Frances Fitzgerald. And the choice that Leo Varadkar now faces is that he must either let his Deputy Prime Minister go, which he says he will not do, or face the inevitability of an election smack bang in the middle of his Brexit negotiation.
And do you think honestly that, you know, given what we've heard this week and all these tensions going on, that Mr. Varadkar would block it? Because I think it's been made very clear that he's not going to deviate from the will of the EU 26 leaders and Michel Barnier, who's a chief Brexit negotiator from the European Union side. Do you think that he would block this in December if everybody else wants to move it forward?
Well, he has said very clearly that he is willing to let it roll on into the new year. I think there's a sense in Dublin that the concerns that Dublin have, vis a vis the peace process, and vis a vis the Irish economy, are really really, really serious, and that it is in this phase of the talks that Ireland can exercise its influence in the negotiations, that once you get into the trade talks, which are very, very important from Ireland's perspective, that Ireland loses influence, because that's when the big economic powers in the EU will come to the fore.
So the view here is that the Taoiseach is very, very serious and that, frankly, that London has yet to come up with proposals that go any distance towards meeting the concerns that there are in Dublin. But it is, of course, clear that if a deal is done on citizens' rights, and a deal is done on the terms of Britain's financial settlement on its way out of the EU, well, then there would be, it seems to me, be considerable pressure on the Taoiseach at that point to help the talks get into the next phase. But Dublin is still not happy and there's no sign of an end to the impasse at this point.
And as you said, they must realise this is their moment of maximum leverage, to put it quite frankly, because once you move from the first phase to the second phase, it's going to be those other countries that have the big say. This sort of tension is always to be expected. But it doesn't really make it any, you know, it's a very emotional situation that's very complex at the same time.
I think that is, I think that is true. But I think, I mean, I mean there is some surprise in Irish circles at the surprise expressed in London at the stance adopted by Leo Varadkar in these talks. I think the view in Dublin is that Dublin has been clear all along that it has very, very specific and important requirements around the future of the Irish border, and that those concerns have been explained at length and repeatedly in engagements with London.
So it's a-- look, it's a political negotiation. It's not over yet. There's an impasse. People are working to get beyond the impasse, but there's no doubt that the pressure is on in a very considerable way right now.
And if you want to know more about the Irish situation, I can recommend two pieces in the FT this week. Arthur wrote an excellent big read that dug into all these complexities. They've also got an opinion piece in the FT Weekend from Ruth Dudley Edwards with her view on the Irish dimension of Brexit.
That's it for this week's episode of FT Politics. Thank you very much to Chris, Arthur, and Miranda for joining. we're back next week for another instalment. FT Politics was presented by Sebastian Payne and produced by Madison Darbyshire. Until next time, thanks for listening.