Today the Chancellor, Philip Hammond, gave his speech at Conservative Party Conference, in which he warned that the UK economy is facing a period “of a couple of years, or perhaps even longer” of turbulence and uncertainty as Britain begins the process of leaving the European Union and negotiates its future relationship with the trading bloc. He announced that UK Government’s fiscal policy would have to change as a result in order to support the economy during this period and stated that the Government’s previous commitment to achieve a surplus by 2020 had been abandoned in favour of increased borrowing and increased investment in infrastructure.
Hammond’s announcements were the highlight in Day Two of the Conference agenda, which was styled under the theme of “an economy that works for everyone” (a line repeated throughout the day by various Ministers including Greg Clark, Sajid Javid and Chris Grayling). The backdrop to his speech was the financial market’s reaction to the Prime Minister’s announcement yesterday on the UK’s timetable and approach to Brexit, which had seen a sharp drop in Sterling and a number of concerns raised about the UK’s future in the single market. Hammond’s speech in the ICC Conference Hall did not exactly get Party delegates cheering on their feet. His dry delivery and awkward attempts at jokes (his line about Strictly Come Dancing fell particularly flat) was not an example of rousing political theatre. His statements, however, did contain a stark message and revealed some major points about UK Government policy.
Firstly, the change in fiscal policy appears to be significant. Hammond dedicated large parts of his speech to his vision for the economy, in which involves the state playing a interventionist role in building infrastructure, raising productivity and rebalancing the economy. He announced more money for housebuilding, support for tech innovation and renewed commitment to the Northern Powerhouse as well as a new scheme known as the ‘Midlands Engine’ centred on Birmingham. These measures will, of course, require additional public borrowing, but the pressures for fiscal discipline are arguably not as great as they once were for the Government. Indeed, it could be said that Hammond has been given license to loosen fiscal policy due to (a) record low borrowing costs and (b) a Labour Party that is unlikely to threaten the Conservative Government on the issue of economic credibility (he described Jeremy Corbyn’s economic policies as ‘la-la land Labour’).
Secondly, Hammond did not attempt to provide businesses with any commitments and reassurance about the future of the UK’s involvement in the single market, or dissuade anyone who now considers we’re heading for ‘Hard Brexit’. In radio interviews earlier in the day, he acknowledged that Brexit has had a significant impact on business confidence and that it would be on “a rollercoaster” for the next few years. He also cited IFS figures that Brexit could knock off four per cent from UK GDP and said they were credible. While Hammond stuck to the Party line that the Government would “make a success of Brexit”, his concerns about its economic impact were clear. His only line about the UK’s future trading relationship with the EU was that he would fight for “the best possible access to European markets for our manufacturing and services industries”, which is not exactly a commitment that will inspire confidence among those reliant on trade with the EU. In reality, however, there was very little more he could say. Hammond is perhaps regarded by many as the best advocate for business in Government and an important counterweight to ideological ‘Brexiteers’ in the Cabinet, but his room for manoeuvre is limited. Yesterday, Theresa May gave a clear indication that she would prioritise controls on immigration over single market membership. With this in mind, the future status of trade with the continent is now largely dependent on what the EU and its remaining member states are prepared to offer the UK once formal negotiations begin.
Hammond stressed that he understands the concerns of business and he recognised that it hates uncertainty. His new fiscal policies and spending commitments may provide some reassurance and support for the economy, but reading between the lines, his message to business was clear — be prepared for the turbulence ahead and hold on tight as we expect a rollercoaster on Brexit negotiations.