Britain’s Finance Chief Walks the Brexit Tightrope
(Bloomberg) -- Since taking charge of Britain’s finances in the wake of the vote to leave the European Union, Philip Hammond has been a marked man.
He’s been accused by Brexit diehards within the governing Conservative Party of spreading fear, even cooking the books over the economic impact. He’s been told his days are numbered for almost as long as the two-plus years he’s been the custodian of the national wallet.
When Hammond delivers his spending plan on Monday, it’s supposed to prepare the U.K. for life after the EU. But he will also be presenting a blueprint to protect Britain from economic oblivion. Growth already lags behind everywhere in Europe except Italy and brinkmanship over Brexit still carries the risk the country will crash out of the world’s biggest trading bloc without a deal.
On the eve of the budget, government-owned Royal Bank of Scotland Group Plc, whose collapse was at the heart of the financial crisis a decade ago, on Friday said it set aside 100 million pounds ($128 million) to reflect the uncertainty. It’s the first British bank to disclose such a provision for Brexit.
Get his plan right and Hammond will buy Prime Minister Theresa May time to rally support in London and Brussels for her Brexit road map and come good on her promise to end austerity measures. Get it wrong and he will feed the vultures in his party and the opposition Labour Party already circling on a government in turmoil.
“Hammond is shaping up for what could be the most politically sensitive budget in many years and one which will be a case of performing the most careful of balancing acts,” said James Hender, a partner at U.K. accountants Saffery Champness who advises senior bankers and hedge fund managers. “The shadow of an unresolved Brexit looms large.”
Hammond, 62, is presenting his numbers early this year to avoid a clash with crunch talks with the EU. Negotiations remain stuck on the quandary of how to avoid customs checks at Ireland’s border with the U.K. while the threat of a leadership contest is ever-present for May as she struggles to unite the warring factions of her own party.
Like May, Hammond campaigned to remain in the EU and has been a lightning rod for Brexit supporters as his boss tries to complete the Herculean task of ending Britain’s 45-year membership. He’s taken flak for promoting the idea of keeping Britain closely aligned to the continent after Brexit day, currently scheduled for March 29. Getting rid of Hammond would be the best thing about May leaving office, one pro-Brexit lawmaker said.
In a speech marking two years after the referendum, he responded to critics by asserting that his department, the Treasury, isn’t “the enemy of Brexit.” Rather, he said, it makes it “the champion of prosperity for the British people outside the EU, but working and trading closely with it.”
Hard-line Brexit supporters say they want an optimistic budget for the post Brexit world. They accuse Hammond of running “project fear” to play down the benefits of Brexit. His political victories -- convincing his ally, Bank of England Governor Mark Carney, to stay on until January 2020 and pushing for a softer Brexit plan -- only reinforced their vitriol.
Former Foreign Secretary Boris Johnson, who resigned over May’s approach to leaving the EU, described the Treasury as “the heart of remain” in government. Jacob Rees-Mogg, who leads an influential group of pro-Brexit lawmakers, said Hammond’s Treasury was “fiddling the figures” when it produced forecasts showing any kind of departure would have a negative impact on the economy.
“The chancellor is trying to obstruct Brexit and I think that makes his position more difficult,” Rees-Mogg said on Oct. 9. He wants Hammond to cut taxes to boost economic growth.
Labour, meanwhile, is putting pressure on the government to end almost a decade of spending cuts that have cut public services and spurred support for its socialist leader, Jeremy Corbyn. The party, which is neck and neck in the polls with the Conservatives, said Britain must spend more than 100 billion pounds on public services to reverse the impact of a decade of austerity. Labour’s finance spokesman, John McDonnell, warned against “financial conjuring tricks” in the budget.
In response, May has tasked Hammond with finding an extra 20 billion pounds a year for the National Health Service, traditionally the biggest single issue among British voters. She also declared an “end to austerity” in her party conference speech earlier this month. The numbers, though, need to be reconciled with cabinet colleagues demanding more money for the police and military.
Then there’s the prospect of food and medicine shortages in the event of no deal with the EU or the 39 billion-pound divorce bill to cover existing European budget commitments if there is an agreement.
“Chancellors like doing budgets when they have cash freedom and policy freedom,” said Torsten Bell, director of U.K. think tank Resolution Foundation and a former special adviser to Labour’s chancellor before the party lost power in 2010. “Hammond's got more cash freedom than most, but he hasn’t got much policy freedom because he’s not massively popular in his own sides and because Theresa May has boxed him in on austerity.”
It’s maybe not surprising then that the photos on the wall of Hammond’s office have him posing from his time in charge of Britain’s defense and foreign affairs.
Indeed, according to one former cabinet colleague, he was more comfortable in former premier David Cameron’s government. Hammond is very cautious, the person said, declining to be identified by name when discussing internal government affairs. His grey image, attention to detail and economic sobriety earned him the nickname “Spreadsheet Phil” as chancellor across British media.
He was disconcerted by speculation he would lose his job in the wake of May’s doomed bid to strengthen her hand in Brexit negotiations by calling a general election for June 2017. She lost her parliamentary majority as Labour scored its biggest share of the vote for 16 years. But May has stood by Hammond as he pledges to keep public debt falling as a proportion of the economy and to keep taxes low, albeit with potential increases through rate thresholds and revision of tax breaks.
Unusually the government has already announced a number of measures that will be in the budget, such as a hit to gambling companies. He’s also planning new taxes to reduce plastic waste in the oceans and freezing fuel duty for another year.
To help solve the country’s housing shortage, the government will lift the cap on the amount local governments can borrow and he’s promised a new tax on tech giants like Google and Facebook. He’s also said he’ll set out the terms of a spending review that is supposed to draw the line under Conservative spending cuts.
May has thrown Hammond “under the proverbial bus” with her announcement that austerity was over, said Labour’s McDonnell. The Treasury won’t be able to find the money, he said.
“The problem for Phil is that he knows that the economy is hardly growing and the chaotic handling of the Brexit negotiations is putting what little growth there is in peril,” McDonnell said in a speech on Thursday.
©2018 Bloomberg L.P.