Theresa May, U.K. prime minister. (Photographer: David Kawai/Bloomberg)

May Needs a Smooth U.K. Budget as Conservatives Seek Revival

(Bloomberg) -- U.K. Prime Minister Theresa May’s crisis-hit government is looking to Wednesday‘s Budget as a shot at redemption to find fresh popularity with voters. But the risk is that it could be another nail in its coffin.

Weakened by infighting over Brexit and the hasty departure of two cabinet ministers in the last month, a badly-received Budget could precipitate the demise of a third key member of her team: the man who sets out spending and taxation and is tasked with resetting the Conservative Party’s economic vision.

May Needs a Smooth U.K. Budget as Conservatives Seek Revival

For Chancellor of the Exchequer Philip Hammond, political survival might be hard given the circumstances. He’s constrained by reduced growth forecasts as a result of the reassessment of productivity, yet has been tasked to wow voters disillusioned by years of austerity.

To cap it all, he needs to satisfy euroskeptic lawmakers who see him as too gloomy about Brexit and partisan in his views -- he voted to remain in the European Union.

“In this budget, we express our resolve to look forward, to embrace change, to meet our challenges head on, and to seize the opportunities for Britain,” Hammond will say as he sets out his tax and spending plans Wednesday, according to extracts released by his office.

While he is expected to stick to his target of balancing the books by 2025, Hammond has already suggested he is on board for limited spending to address the anger that contributed to May’s catastrophic performance in the June election.

Commitments will focus on winning over some of the young, who unexpectedly showed up at the ballot box and whose support for Labour leader Jeremy Corbyn eroded May’s majority.

May Needs a Smooth U.K. Budget as Conservatives Seek Revival

On Sunday, Hammond said he’ll pledge billions of pounds in investment in housing. Smaller measures geared at younger voters will include discounted rail travel for the under-30s, and reforms to prevent graduates overpaying student loans. Nurses have also been promised a pay rise, relaxing part of the seven-year freeze on public-sector pay.

“Instead of gimmicks such as driverless cars, or tricks to fiddle the figures just so Phillip Hammond can pretend he is reaching his own targets, there must be a recognition of the emergency in our public services and an actual end to austerity,” said John McDonnell, who would be chancellor if Labour were in power.

The chancellor will also seek to rebuff criticism from those who have accused him of talking down Brexit by seeking to paint a positive picture of Britain’s future outside the bloc. At least as positive as his forecasts will allow.

Britain will have “a prosperous and inclusive economy where everybody has the opportunity to shine wherever in the U.K. they live, whatever their background,” he will say. “An outward looking, free-trading nation, a force for good in the world, a country fit for the future.”

Still, an uncertain economic picture, revised productivity data and his own natural caution will leave him little room for further giveaways. And those he will announce may simply not be enough.

A pledge by Hammond to build 300,000 new homes falls short of the far more ambitious push by Communities Secretary Sajid Javid, which included allowing homes to be built on green belt land, and the chancellor also poured cold water on demands for more money by the National Health Service -- a beloved institution founded after the Second World War. The budget will also include a 219-million-pound ($290 million) increase in schools spending, to encourage math teaching.

“He is a dead man walking, but then again this is a dead cabinet walking,” said Steven Fielding, professor of political history at the University of Nottingham. “We’ll get a gesture or two to make the government seem like it cares, but beyond that their only hope is to get to the other side of Brexit.”

Another risk for Hammond is that he is prone to political missteps. In defending planned government investment in artificial intelligence on Sunday, he said “there are no unemployed people” when he meant to say that technology could be a job creator. Labour was quick to seize on his remarks.

In March, a measure to increase taxes on the self-employed caused such a backlash within his own party that he was forced to abandon it within 24 hours.

“The last thing they need this time is for it to go wrong,“ said Fielding. “Even something trivial can end up defining what should be an important fiscal event. This needs to be as nailed down as possible.”

‘Budgets Unravel’

The key for Hammond is to avoid any “controversial” decisions that would be tough to pass in the House of Commons with May’s narrow majority, according to BlackRock Inc. money manager Rupert Harrison, who advised Hammond’s predecessor, George Osborne.

“Budgets unravel if you do not have a majority in the House of Commons for the measures in them. That is particularly likely at the moment because the government has a very, very small majority,” Harrison said on Wednesday in a BBC Radio interview. “The likelihood of losing any controversial vote is very high, and therefore the key thing is to avoid them.”

May must look to the outcome of a crucial Brexit summit in December before making any significant changes to her ministerial team -- and it is the outcome of divorce negotiations that will decide the government’s future direction.

“The budget can’t address the crisis the government finds itself in, and cannot afford the Tories the opportunity to reset they’re hoping for,” said Mij Rahman, a political analyst at Eurasia Group in London. “For the government to move the political consensus forward, and agree on the long-term end-state for Brexit. It’s a much bigger question.”

©2017 Bloomberg L.P.