The news that Philip Hammond is expected to resign now that Boris Johnson has become Prime Minister was no surprise, given what the Chancellor has already said about the potential aftermath of a “come what may" no deal Brexit on 31 October. So, what will face the new inhabitant of 11 Downing Street? Three issues spring to mind immediately:
- An emergency Budget According to a report at the end of last month in The Times, Boris Johnson is planning an emergency no-deal Brexit Budget for September. Jeremy Hunt had spoken in similar terms, suggesting a Budget in the week parliament reassembles after its summer holidays. However, there are two timing issues to any early Budget:
- The current parliamentary timetable is that the House of Commons will enter its summer recess on Thursday 25 July and will return on 3 September. There is no future calendar on the Parliamentary website, but based on past years, parliament will only sit until 12 September before entering the conference season recess, which would take us through to 8 October (the Conservative Party conference runs from 29 September to 2 October). Fitting a Budget in before October will therefore leave little time for immediate debate on what could be a controversial set of proposals. Both johnson and hunt made some expensive tax-cutting pledges.
- The Office for Budget Responsibility (OBR) needs ten weeks’ notice to prepare the Economic and Fiscal Outlook (EFO) that accompanies the Budget. Ten weeks from 24 July takes us to 2 October. There has been no indication that Mr Hammond has already fired the OBR starting gun.
To complicate matters further, the OBR has hitherto made its EFO calculations on the basis of a smooth Brexit. For an emergency no-deal Budget, the OBR would have to start from a significantly different assumption which will need a steer from the new Government. Fortunately, in its Fiscal Risks Report published last week the OBR did examine the downsides of a no deal Brexit, based on a scenario developed by the IMF (which, unsurprisingly, is disputed by Brexiteers). As the OBR dryly notes, “The Treasury are legally committed to respond to [the]… report”…
- The spending review The current spending cycle is coming to an end and, at, the 2019 Budget is meant to set out the terms of the next spending review. In theory this should cover 2020/21 and the next two financial years. In practice the uncertainties surrounding Brexit have meant that it always looked likely Mr Hammond would set figures for the just coming year. The change of Chancellor, together with the revised tax/spending priorities of a new Prime Minister and the possibility of an early general election now make that one-year interim approach a near certainty.
- Government finances Government borrowing numbers came in well below the level forecast by the OBR at the time of the Autumn 2017 Budget – the latest figures suggest 2018/19 borrowing was £23.5bn against an original forecast of £39.5bn. However, the new Chancellor could be taking up post without Mr Hammond’s good fortune. Last week’s Public Sector Finance data were worse than expected. In the first three months of 2019/20 borrowing was £17.9bn, up £4.5bn (33%) on same period in 2018/19. While revenue was in line with forecasts (up 3.1% v 2.7% full year), Government expenditure was up 5.9% against an OBR full-year forecast of 3.3%. The OBR pins at least some of the blame on ‘the more generous NHS settlement”.
To add to the new Chancellor’s woes, in September the revised treatment of student debt will finally come into effect, adding about £12bn to borrowing number for the current year.
The Chancellorship will be one of the key appointments of the new Prime Minister. It is a prized role, at the epicentre of Government, but it can also be a poisoned chalice. On this occasion, the toxicity element looks dangerously high.