Chancellor Philip Hammond is to adopt a new flexible fiscal framework in this month’s Autumn Statement, banishing rigid targets to ensure the government has “headroom” to react if Brexit fallout hits the economy.
Mr Hammond told cabinet colleagues on Tuesday to expect only a modest fiscal stimulus, with a programme of new infrastructure spending expected to run to the low billions of pounds a year.
But his new fiscal plan, while aimed at achieving a balanced budget in the next parliament, would allow a greater stimulus package to be unleashed if the current robust rate of economic growth starts to falter.
“The goal is to create some headroom so it can be deployed if necessary,” said one official close to the cabinet discussions. “The chancellor made it clear we face an unprecedented level of uncertainty.”
Theresa May’s spokeswoman said the cabinet discussed the “importance of continued fiscal discipline” and “the need to drive up productivity”; the new infrastructure projects will be aimed at boosting growth.
The government has already said it will not try to hit former chancellor George Osborne’s aim of running an absolute surplus by 2019-20 and Mr Hammond’s ambitions are set to be significantly more lax even if the government rejects what the chancellor calls a public spending “splurge”.
One way he will increase his chances of sticking to his targets is by setting more lenient rules, with significant room to allow the deficit to rise if the economic environment sours.
Mr Hammond’s cabinet briefing marked a sharp departure from the approach of his predecessor, who only showed colleagues the contents of his Budget box on the day of his set-piece Commons appearances.
The chancellor has told Conservative MPs he does not want to use the Autumn Statement on November 23 to produce “rabbits out of hats”, but to set out a sober fiscal response to the Brexit vote.
“He has told us that now isn’t the time for lots of small changes,” said one Tory briefed by Mr Hammond. “This is a time for consistency, preparation and steadfastness.”
Ever since the referendum on EU membership, the main economic indicators have performed more strongly than economists and officials in the Treasury and Bank of England expected.
While the chancellor has welcomed the robust data on growth and jobs, few in his team are confident the benign outlook will last once people discover their wages are not rising as fast as prices and companies pull some investment projects.
Although official figures show the economy expanded at the healthy rate of 0.5 per cent in the third quarter, that preliminary estimate has also coincided with much worse news from the exchequer, where tax revenues have been much lower than expected.
The Office for Budget Responsibility, which has already produced its first round of economic and public finance forecasts for the Treasury, says Mr Hammond is “very unlikely” to hit the March Budget deficit targets for this year.
He has told us that now isn’t the time for lots of small changes. This is a time for consistency, preparation and steadfastness
The chancellor will reveal borrowing much higher than hoped at the time of the March Budget but still declining gradually, allowing him to say that the Conservative government is still in the business of deficit reduction.
Unlike Gordon Brown, Alistair Darling or Mr Osborne, Mr Hammond wants to be the first chancellor to stick to official fiscal rules throughout his time in office.
Mrs May’s spokeswoman said that during the meeting ministers had “welcomed the opportunity to hear how work [on the Autumn Statement] was progressing”, an apparent dig at Mr Osborne’s more secretive approach.
She said Mr Hammond’s presentation reflected “the prime minister’s approach to collective government and having more of these discussions early on” in the policymaking process.
Ministers also welcomed Mark Carney’s announcement that he would extend his term as Bank of England governor, she added.
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