Why Philip Hammond's Budget headache will become Theresa May's Brexit nightmare

There's a big difference between winning an election and implementing your promises. 

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British austerity is an electoral success but it is also, increasingly, a political failure.

In May 2015, the Tories ran on a platform of continuing cuts and a £12bn reduction in the size of the welfare bill. By the autumn, they were locked in a damaging row with their own voters over their plans to cut tax credits. The government retreated, George Osborne’s career went up in smoke, and any realistic prospect of the government actually making £12bn worth of welfare cuts did too.

Wherever you look, the difference between winning an election on a platform of making cuts to services and being able to successfully cut spending is being exposed. The attempt to increase business rates has been angrily resisted – by Tory MPs, and the government has U-Turned. Now they are facing resistance over plans to change the ways that casual workers in the public sector are taxed and rules on insurance premiums in a bid to meet their deficit targets and they will very probably U-Turn on those too.

Across the public realm, far from continuing to close the deficit, more money is having to be found – to stave off further crisis in prisons and to prop up the National Health Service. You might be able to get majorities in Parliament based on cutting public spending, but Conservative MPs tend to austerity Nimbys – cuts are good, provided they don’t happen to anyone who lives in my constituency.

That leaves Philip Hammond with any number of headaches in his first budget on 8 March, because in addition to balancing all that, he has to keep the Conservatives’ promises on tax cuts – that , is, to continue to have the lowest corporation tax in the G7 and to continue increasing the taxable threshold and the higher rate of income tax.

Hammond’s Budget headache may soon become Theresa May’s Brexit one.

On any fair reading of the lines taken by the campaign to stay in and the campaign to get out, the single market was on the ballot paper. On the Leave side, a campaign based on two things: that the money we pay into the European Union’s budget could be reinvested in British public services and that 75 million Turks would be prevented from gaining visa-free access to the United Kingdom. On the Remain side, that leaving the European Union would trigger a severe recession and a permanent downturn in British prosperity.

For these promises to mean anything, the argument has to be understood as one about Britain’s continuing single market membership. There is no country that enjoys the benefits of single market membership without paying into it, so you can’t keep that promise. Equally, there is no way to be in the single market without being subject to all four freedoms, including the free movement of people, so you cannot “take back control” of Britain’s borders in the single market either.

And as far as the Remain campaign’s message of economic danger was concerned, there’s not an economic danger to remaining in the single market but outside the political structures of the European Union. There’s an opportunity cost as far as the ability to drive changes that benefit the British economy at an EU level, there’s a wider democratic deficit in being subject to the decisions of the 27 member states of the EU but being unable to share them, but there is not an economic hit to be suffered.

But while people may have voted to leave the single market de facto, they did so while believing they wouldn’t get any poorer. The big difference between Remain and Leave voters wasn’t their support for immigration, but whether they thought they’d have to pay anything to reduce it.

And the difficulty is that you can’t reduce immigration without hurting the economy. (In fact, the only really effective way to lower immigration is to lower economic growth.) Nor can the British economy simply rely on restricting immigration to high-skilled migrants, as it is unclear how labour shortages in Britain’s care and agricultural sectors can be filled with British labour alone.

The solution to Hammond’s problem is at least clear: continuing cuts in areas without Conservative MPs, and more borrowing in lieu of any serious measures to close the deficit. The solution to the Brexit problem is more difficult to see: on the one hand, break promises on immigration, on the other, keep them at a price people are unwilling to pay. Or, perhaps most difficult of all for the government: take the economic hit from leaving the single market while still having the same levels of migration as we do today.

 

Stephen Bush is political editor of the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.