New U.K. Budget Keeps Its Eye on a Brexit Deal

(Bloomberg Opinion) -- Britain’s Chancellor of the Exchequer Philip Hammond barely uttered the B-word in the entire 80 minutes it took him to unveil the latest U.K. budget on Monday. Inevitably, though, Brexit was the elephant stomping around the room — or, rather, one of them.

Exit negotiations with the European Union are stalled over a disagreement about how to keep the border open between Ireland and Northern Ireland, soon to be the only land border between the U.K. and EU. It’s possible that agreement will be reached in the next couple of months. But any deal that is acceptable to Europe may be rejected by the U.K. Parliament, leaving the U.K. to exit on March 29, 2019 with no divorce settlement in place at all.

Mindful of that, Hammond told Parliament that the budget may be superseded by a new one in the spring if Britain leaves Europe without a negotiated exit.

How the U.K. leaves the EU has such a profound impact on public finances that it makes current planning seem absurd. For example, an orderly exit with greater access to European markets would leave the chancellor with an additional 30 billion pounds ($38.3 billion) to spend on average over the next four years, according a report to be published Wednesday in the National Institute Economic Review. Without a Brexit deal, that fiscal space all but disappears.

So Hammond’s budget sent bouquets to various groups whose votes for a deal will be required. There was additional money for Northern Ireland, whose small Democratic Unionist Party continues to prop up the Conservative Party government of Prime Minister Theresa May. There was added money for Scotland and Wales. There were giveaways for hard-line Brexiters too. The announcement of a new 50-pence coin commemorating Brexit prompted a raft of Twitter jokes. The new coin will bear the words “friendship with all nations” spoken in Thomas Jefferson’s 1801 U.S. presidential inaugural address but not those that followed: “entangling alliances with none.”

And yet the budget seemed more directly aimed at a different elephant: the Labour Party. Hammond told lawmakers (seven times) that the “era of austerity” is coming to an end. His use of the present continuous tense was a notable pull-back from May’s recent declaration that austerity “is over,” but the core message was clear.

Conservatives, not Labour, are trustworthy economic stewards, Hammond was saying, but are no longer obsessed with balancing the budget. Conservatives, not Labour, the argument went, are the party of business, but now think that business can’t grow without better infrastructure, education and services. Conservatives heard the cries of Brexit voters in 2016 and Labour voters in 2017, when Labour won its largest vote-share increase since World War II; so we are investing.

The budget’s tone was set in May’s party conference speech this month in which she repositioned the Conservative Party more to the center of British politics. Hammond tried to hew to May’s oratory without sounding like Labour-lite.

Mostly, he succeeded, with help from a stroke of luck and the relative strength of the U.K. economy. The independent Office of Budget Responsibility announced higher than expected tax revenues in 2017-2018 and lower estimated spending needs, which it forecast would continue through 2023, providing the cautious chancellor with a windfall. So he had the good fortune to be able to write checks liberally — to the tune of that 30-billion pound boost to public spending by 2024. He detailed  extra funding for the National Health Service (including a previously announced 20.5 billion additional pounds, a little over $26 billion), plus money for schools, new mental-health services, added social-welfare spending, defense and increased capital spending.

Hammond and May are right to pay close attention to the causes of discontent; today’s divided Conservative Party faces a dwindling membership and struggles to attract younger voters and so is not in good shape to contest an election if it comes sooner than expected. And the U.K. needs a cohesive and coherent Conservative Party. Labour’s radical plans to redistribute wealth are appealing to many, especially younger voters with no memory of socialist policies at home and abroad. But if a Labour budget reflected all the party’s promises, it would shrink the economic pie and make improved social mobility harder to achieve.

If the Tories can show that they have solutions to the problems that motivate Labour support, from housing shortages to wage stagnation and inequality, they will prove difficult to beat. That won’t be easy, though. Divisions over Brexit run so deep at the moment that there’s little room for other debates. But there will come a time when Conservatives will have to resolve the big question of what kind of state they want to finance. Hammond’s budget has left that question open.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Therese Raphael writes editorials on European politics and economics for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.

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