Philip Hammond, U.K. chancellor of the exchequer, arrives for a weekly meeting of cabinet ministers at number 10 Downing Street in London. (Photographer: Chris Ratcliffe/Bloomberg)

Damage Control Is All the U.K. Budget Can Do

(The Bloomberg View) -- Pity Philip Hammond, the U.K.’s chancellor. He’ll be proposing a budget today amid political chaos, faltering public services, simmering anger, and, in the background, the specter of Brexit. Also: He’s supposed to simultaneously cut taxes, end austerity and reduce debt. It’s an impossible task. And this budget — the last before Brexit — will be a premonition of bigger debates to come.

Start with the good news. Britain’s budget deficit is now about 2 percent of GDP, down from 10 percent in 2010. Public sector debt, for the moment, is under control. A forecast from the Office for Budget Responsibility suggests Hammond will have an added 13 billion pounds ($16.7 billion) a year to work with, thanks to higher-than-expected tax revenue.

He’ll need it. Fiscal prudence has come at a steep public cost. Most obviously, services are breaking down. Crime is rising, even as police budgets fall. A once-promising welfare reform is in turmoil. There’s talk of crises in education, housing, prisons, transportation and more. Some of this may be overheated. But the picture isn’t encouraging.

Meanwhile, the U.K. is aging quickly: 26 percent of its population will be over 65 by 2067, up from 18 percent last year, implying a steep increase in costs for pensions, health care and long-term care, among other things. The European Commission estimates age-related spending will be more than a quarter of GDP by 2065.

Brexit will amplify every one of these problems. Slower growth, less migration and upward pressure on inflation due to a weaker pound will worsen the fiscal outlook. Plans to erect new border controls — so far a shambles — could prove costly for years to come. Then there’s the small matter of the 39 billion-pound ($50 billion) exit bill.

One year’s budget can’t resolve these challenges, of course, and the uncertainty imposed by Brexit would make it foolish to try. But it can signal priorities. For now, there should be two.

The first is to address the deterioration of Britain’s essential public services — as Prime Minister Theresa May has promised. By one estimate, this would require additional spending on the order of 31 billion pounds ($40 billion) a year by 2022. That isn’t realistic. But at a minimum, the budget could make good on May’s promised boost to the National Health Service, while committing to keeping spending on most other services constant in real terms. Even that won’t be cheap: about 19 billion pounds ($24.4 billion), reckons the Institute for Fiscal Studies.

Thus the second priority: Adequately funded public services will require higher taxes, and the budget should say so. For starters, Hammond could propose a further reduction in tax relief for pension contributions, less generous tax benefits for the well-off, and a more moderate tax cut for corporations than his party has promised. He could also propose eliminating exemptions to the value-added tax and boosting national insurance contributions. None of this, to put it mildly, would be popular.

In the end, Britain’s fiscal problems might be impossible to solve without higher growth. That, in turn, will require a recovery of economic confidence, and an end to the risks and anxieties that Brexit has caused. That isn’t in Hammond’s power this week. All he can do is limit the damage.

Editorials are written by the Bloomberg View editorial board.

©2018 Bloomberg L.P.