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Hammond finishes Lamont's work

Hammond finishes Lamont's work

Chancellor least meddlesome in decades

by Brian Reading in London

Fri 10 Mar 2017

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On Wednesday Philip Hammond, Britain’s chancellor of the exchequer, presented parliament’s 634th annual spring Budget. It was his first and the last of the spring Budgets. Henceforth Budget day will be in autumn – a wise move.

Apart from some uproar over increased national insurance contributions for the self-employed, ‘to tax and to please is not given to no man’, Hammond did ‘nothing in particular and did it very well’. He added a little to demand. He made fewer intrusive changes than any of his recent predecessors. The 2017 Budget financial statement gives costs and revenues for 25 policy changes. In 2016 former Chancellor George Osborne announced 68 changes. Hammond is the least meddlesome chancellor in decades.

The break with Budget tradition is long overdue. The financial year goes from April to the following March. A March Budget is too early to know the outcome in the financial year just ending and too late substantially to change taxes and spending in the year just starting. It encourages meddling. It has been eclipsed since 1976 by an autumn statement, effectively a second Budget. Changing the financial year to the calendar year, the alternative to scrapping the spring Budget, would be immensely disruptive.

In his 1993 Budget Norman Lamont, the then chancellor, one of Britain’s best, first proposed scrapping the spring Budget. He was sacked 10 weeks later to take the blame for Britain’s ejection from the European Exchange Rate mechanism in September 1992. He had always rightly opposed ERM membership but John Major, then prime minister, handed him a poisoned chalice. Lamont was right. It has taken another quarter of a century for common sense to prevail.

Budgets macromanage the economy, measured by the net amount they increase or reduce the government’s tax and spending balance. Normally this involves Keynesian counter-cyclical demand management, with curbs in a boom period and spending boosts during economic slump. Since the 2007-08 global financial crisis, reducing the size of the public sector’s deficits and debts through austerity measures has been a priority.

Monetary policy has been given the task of stimulating demand, encouraging the debt-ridden to borrow and spend. Hammond’s Budget marginally relaxed his position, taking advantage of unexpectedly buoyant growth and tax revenues since the UK’s June 2016 referendum vote to leave the European Union.

Budgets also micromanage the economy, taking from one pocket and giving to another. This includes using taxation as a vehicle for reallocation of resources. Micromanaging can be measured by the ratio between net changes in the Budget and the gross changes in give-and-take policy measures.

The less a chancellor needs to do to macromanage, the more they find to do to micro-meddle. Gordon Brown, who presented 10 spring Budgets, and George Osborne, who presented eight, were equally invasive chancellors. Alistair Darling took over the UK Treasury in 2007 when Brown became prime minister. His three Budgets to 2010 initiated the period of austerity in Britain, when significant macro-tightening left less room for interfering. Hammond stands out as the least meddlesome.

Little net change in the Budget balance was matched by fewer gifts and grabs. Perhaps Hammond, like Lamont, will set down a marker that stands the test of time.

Brian Reading was an Economic Adviser to Prime Minister Edward Heath and is a Member of the OMFIF Advisory Board.

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