On 10 October 1974, the day Philip Hammond began at Oxford University, Harold Wilson’s final Labour administration was elected. That government, Hammond later recalled, “ended in disaster” five years later. The “winter of discontent” was a formative experience for the future Chancellor. He came to believe that the “first responsibility” of government was to “promote economic stability, sound money, and prudent public finances”.
Those who assumed that Hammond’s postponement of George Osborne’s surplus target was the prelude to a Keynesian spending splurge were always likely to be disappointed. The change in stance was an acceptance of reality, rather than an ideological statement. Osborne himself, renowned for missing his self-imposed targets, had already conceded that the goal was unachievable. Hammond’s decision did not, however, mark the end of austerity. Unprotected departments have been asked to model cuts of up to 6 per cent by 2020. Osborne may have left the Treasury but under Hammond, his deputy from 2007-10, Osbornomics endures.
The new Chancellor’s refusal to fund new spending through greater borrowing (preferring tax rises or cuts) is another mark of his fiscal conservatism. But there are other reasons why Hammond’s first Budget on Wednesday will not herald a radical break with his predecessor. As an economic event, the Chancellor’s statement is secondary to the triggering of Article 50 later this month. The deal that the UK does (or does not) strike with the EU will do far more to shape its destiny than the Treasury.
Hammond, a teenage goth and swashbuckling entrepreneur before he was christened “spreadsheet Phil”, has threatened to change Britain’s “economic model” if the country is locked out of the single market. The Chancellor and Theresa May (who echoed his warning) have said little on what this would entail. But the implication is that the UK – a mainstream, mixed market economy – would aggressively cut taxation and regulation. Singapore is traditionally cited as a model, though the city state’s dirigiste approach means the quasi-tax havens of Ireland and Luxembourg are more apt comparisons. The EU has long feared the economic harm that a libertarian UK could inflict on it.
The seeming incompatibility of this approach with May’s vision of a reformed capitalism and a more interventionist state has led some to argue that the threat is a mere negotiating tactic. Others question why, if free market policies would stimulate growth, the government does not pursue them regardless of Brexit. But the Conservatives’ focus on EU withdrawal means there is little pressure on Hammond from the Thatcherite right to do so. Eurosceptics are satisfied by the Chancellor’s acceptance of their foremost goal: withdrawal from the single market. By way of return, Hammond, who has forged close relations with David Davis, has secured backing for a transitional arrangement.
As an instinctive pragmatist, Hammond’s approach will be shaped by events. In the age of Brexit, the Chancellor’s eschewal of political pyrotechnics is fortunate. More than most, he knows that the real action will take place elsewhere.