City of London grandees sitting down at the annual Mansion House dinner to hear almost-certainly valedictory speeches from chancellor Philip Hammond and Bank of England governor Mark Carney may have wondered who will address them next year — and what sort of message the next chancellor will bring about Britain’s economy. So far, policy proposals from Boris Johnson and Jeremy Hunt, the two remaining candidates to become Conservative leader and prime minister, have been anything but encouraging.
Mr Hammond’s warning for the next leader is stark. If Britain leaves the EU without a trade agreement, the damage done to the economy will consume the headroom built into the chancellor’s fiscal plans that would otherwise be available for spending or for tax cuts. Better-than-expected tax receipts last year mean he has a £15bn buffer, once changes to the treatment of student debt are taken into account. This would be devastated by a no-deal Brexit, which would leave the economy permanently smaller, the chancellor says.
By no means should Mr Hammond have the last word on fiscal policy — there is a case to review his targets and a debate to be had about the pace of debt reduction. But he is right that at this point in the economic cycle the UK should try to lower debt levels relative to national income. He is also right that the contest between the Tory leadership candidates has an air of unreality about it. A no-deal Brexit, moreover, would destroy what is left of his party’s reputation for responsible government and stewardship of the public purse.
Absent a disorderly Brexit, there is little need for borrowing to boost the economy. Bank of England policymakers estimate that the economy will grow faster than its potential and near-record low interest rates are continuing to provide stimulus. The British economy does not need the kind of temporary sugar-high provided by Donald Trump’s corporate tax reform.
Tax cuts squarely aimed at appealing to the Conservative membership are not a sensible way to approach fiscal policy. The wealthiest people in Britain do not need more help. Few businesses see Mr Hunt’s proposals to cut corporation tax to Irish levels as a priority. Worryingly, neither of the candidates for leadership, who have both been in government, seem to have thought deeply about what they want the country to look like in the decades ahead.
Most frustrating, however is the missed opportunity the contest so far represents. Britain does need to have a debate about the structure and level of tax and spending. There is an appetite among the public to alleviate the strain on public services after a decade of austerity — Mr Hunt, a former health secretary, has said social care cuts went “too far”. The Conservative party membership should question Mr Johnson and Mr Hunt about how they would reform taxation and, if taxes need to rise to pay for an ageing society and a less productive economy, where they would increase them.
If Mansion House attendees needed more reason to feel glum about the outlook for British economic policy, they could consider Jeremy Corbyn’s opposition Labour party. Its chief spending priority appears to be eradicating the student loan system and it is mired in its own inner turmoil over how, or whether, to leave the EU.
Whoever appears at the dinner next year is likely to face a more frosty reception from representatives of the financial industry. Neither of the main parties appears interested in courting the business vote. That may help them appeal to activists who have lost faith in the financial sector since the crisis, but it will do nothing for Britain’s economy.