Chancellor’s Brexit 'deal dividend' judged ‘not credible’
12 Feb 2019
In a highly critical report on Budget 2018, MPs have said it is ‘not credible’ for the Chancellor to refer to a Brexit ‘deal dividend’ and called for the Treasury to supply more information so that the Office for Budget Responsibility (OBR) can provide a detailed Brexit assessment at the Spring Statement next month
12 Feb 2019
The Treasury committee took issue with Philip Hammond’s claims that once a withdrawal deal has been agreed with the EU, there would be a ‘deal dividend’, which he described as a ‘boost from the end of uncertainty, and a boost from releasing some of the fiscal headroom that I am holding in reserve at the moment.’
The OBR said it was ‘odd’ to refer to this as a dividend, when ‘what is being talked about is avoiding something really very bad’.
As the OBR already assumes an orderly Brexit in its forecast, no ‘deal dividend’ over and above the existing forecast could be attained simply by avoiding a disorderly, or no-deal, outcome. Beyond this, there could be some improvement to business confidence and investment following an orderly transition or a resolution of Brexit-related uncertainty that is not currently forecast by the OBR. It is not credible that this be described as a dividend, the committee stated.
MPs also criticised the Treasury for failing to keep to the timetable that it had agreed with the OBR at the outset of the forecasting process, with the result that the economic and fiscal forecasts are not fully consistent.
The report stated: ‘As the 2019 Spring Statement may be the first opportunity that the OBR has to make a more detailed assessment of the UK’s short-term prospects post-Brexit, it will be even more important than usual that the government provides the OBR with the resources and information that it needs in a timely fashion. The committee will seek assurances that it has done so.’
The committee said the Chancellor’s fiscal objective – to return the public finances to balance at the earliest possible date in the next Parliament - now has no credibility, given the pledge to spend more, notably on additional NHS funding. MPs are calling for a new objective that accurately reflects government policy and priorities.
In addition, MPs warned the Chancellor he had been ‘fortunate’ at Budget 2018, in that the OBR’s reassessment of the structural level of the tax revenue to GDP ratio enabled him to fund increased spending plans and some tax cuts without an increase in the borrowing forecast.
The report stated: ‘More difficult choices will likely lie ahead at future budgets about the UK tax base, and how to fund the Chancellor’s pledge to “end austerity”.’
Nicky Morgan, chair of the Treasury committee, said: ‘It’s clear that the government should update its Charter for Budget Responsibility. The Chancellor appears to have disregarded the fiscal objective of achieving a surplus and says that he prefers securing economic growth as a better way of shrinking the debt as a proportion of GDP. As the objective now has no credibility, Parliament cannot use it to hold government to account, and it should be replaced.
‘Claims by the Chancellor that austerity is coming to an end are expansive and imprecise. He should set out what he means in more measurable terms, especially as he will face more difficult choices at future budgets for how to fund such a pledge.
‘The upcoming Spring Statement may be the OBR’s first opportunity to assess the UK’s short-term prospects post-Brexit, and for Parliament to scrutinise the finances behind any withdrawal deal. The government must, therefore, ensure that the OBR has the resources and information it needs to produce an accurate forecast.’
Separate research on forecasts for the 2019 spending review, which may be announced at the Spring Statement, has been published by the Institute for Fiscal Studies. This suggests that to avoid any cut to real-terms per capita spending on unprotected services would require an additional £5bn by 2023–24. Maintaining spending on unprotected services as a share of national income would require £11bn on top of the plans set out in the Budget.
The Spring Statement is on 13 March.
Report by Pat Sweet