Budget 2018: Will the chancellor end austerity?

The chancellor, Philip Hammond, is instinctively conservative and now is not a time for boldness.

The government he serves in is weak and the outcome of Brexit negotiations remains unclear.

There are compelling reasons for the chancellor to make today’s "fiscal event" a non-event - postponing difficult decisions until next year.

But when Philip Hammond stands up in the Commons at around 15:30 this afternoon he will have to serve-up something that is seen to be delivering on the Prime Minister’s recent promise to bring an "end to austerity".

"The British people need to know the end is in sight," Theresa May told the Tory party conference earlier this month.

Philip Hammond needs to signal a loosening of the purse-strings.

• What is austerity?

The Government’s austerity programme began in 2009/2010 and was designed to reduce the deficit - the difference between what the government spends and what it has coming in.

In 2009/10 the government borrowed an extraordinary £153 billion, as the financial crisis and the recession that followed hit the public finances.

Over the last eight years, a series of spending cuts and tax rises have helped to successfully bring public sector net borrowing down from an unsustainable 10% of GDP to a more normal, pre-crisis level of around 2%, although our national debt has doubled.

This progress has come at considerable cost. Public services are showing clear signs of malnutrition.

Now even the Government has decided it’s fed up of austerity.

• How will the chancellor end it?

The most obvious way for the chancellor to indicate that austerity is over would be to announce what’s called the "spending envelope" for government departments.

Keep your eyes peeled for what happens to 'real Resource Departmental Expenditure Limits (RDEL)' spending.

Government departments have had their funding cut savagely in recent years. The chancellor needs to reverse this trend.

RDEL spending is already forecast to rise in "nominal" terms. It will also need to be rising when adjusted for inflation and population growth for the chancellor to claim he has ended austerity in a meaningful way.

A typical "spending review" covers a five year period but the chancellor may decide that, in the circumstances, (uncertainty around Brexit and the next election is due in 2022) the envelope will cover a shorter period. Possibly even a single year.

• Would that be enough?

Probably not. Critics would point out that this move alone would do little to help either local authorities - which have seen their budgets collapse by one fifth since 2009/10 - or those on benefits.

There are still planned cuts to working age benefits making their way through the system. The Institute for Fiscal Studies (IFS) calculates that unwinding them would cost the chancellor around £7 billion by 2022/23.

Working age benefits are due to be frozen for another year from next April. The Government’s controversial - and less generous - program of Universal Credit continues to roll out.

The chancellor also has to find the extra money the Government has pledged to fund the NHS (£12 billion a year by 2022/23, according to the IFS). And deliver on commitments to bolster funding for Defence and International Aid.

And he has to fund the freeze to Fuel Duty the PM promised. And find a way of financing his program of Business Rates Relief, announced on Saturday.

• Where will he get the money from?

He’s in line for a windfall. The Office for Budget Responsibility (OBR) will lower its borrowing forecast, giving the chancellor room for manoeuvre.

Tax receipts have been much stronger than the OBR forecast in March and debt interest charges lower.

Look out for the OBR’s "Public sector net borrowing numbers" for this year and those to follow.

In March the OBR predicted the chancellor would have to borrow £37 billion in 2018/2019, that number will fall significantly.

He also has headroom. The chancellor’s "Fiscal Mandate" commits him to reducing the deficit to less than 2% of GDP by 2020/21.

The Resolution Foundation estimates he is already on course to do so with around £15 billion of 'headroom' to spare.

This is money which, in theory, the chancellor could allocate elsewhere.

• Will the chancellor end austerity and balance the budget?

He’ll struggle. The deficit has returned to pre-crisis levels but the Government has made a promise to eliminate it the altogether by the "middle of the next decade".

This is not an aspiration, it was pledge in the Government's election manifesto last year.

Unless economic growth suddenly shifts up a gear - and it’s not forecast to - it’s fair to say it will be very difficult for the chancellor to end austerity and balance the books by the mid-2020s without raising taxes.

The OBR is currently forecasting growth of 1.5% in 2018 and 1.3% next year.

The chancellor has found out previously that reneging on an election commitment can cause embarrassment and even u-turns.

The pledge to balance the books is also hard to jettison because it’s politically important - a point of difference with Labour.

• Will he raise taxes?

Almost certainly, but bet against significant increases.

Public attitudes towards paying more in tax for better public services appear to have softened but Philip Hammond is a "low tax Tory" and large tax hikes will be hard to sell to his own party, let alone the Democratic Unionist Party (DUP), on whose support the Government depends.

Hammond is also hemmed in by election manifesto pledges not to raise the level of VAT and to raise the personal allowance thresholds for income tax.

The Resolution Foundation calculates the chancellor could raise £6 billion by abandoning a plan to cut corporation tax (paid by companies on their profits) to 17% by 2020.

The Resolution Foundation predicts there would be very little resistance from business, although the tax cut has already been legislated for and doing so would also mean breaking an manifesto promise.

• Won't austerity be ended by a Brexit dividend?

You will recall that, during the referendum campaign, Leave campaigners promised that quitting the EU would free up £350 million a week (£20 billion a year) to spend on the NHS.

This figure was wildly misleading because it suggested there would be an immediate, bankable benefit to departure and ignored both Britain’s EU rebate and the sums of money the EU spends on projects in Britain.

In June, when the Prime Minister announced extra funding for the NHS, she claimed it would be part-financed by a "Brexit-dividend".

Brexit will have an impact on the public finances but until now the OBR has - not unreasonably - refused to estimate what it might be until the terms of the settlement with the EU are clearer.

As it stands, the OBR makes no allowances for any financial gain from leaving the EU.

Indeed it calculates that there will be an initial cost, as Britain begins making "divorce" payments to Brussels until 2023 (the period it forecasts over).

The chancellor has also spoken of a "Deal Dividend" but don’t expect it to materialise today.

Philip Hammond is assuming that if a deal is done, if Britain’s trading relationship with the EU remains predominantly frictionless and close, then the OBR will revise up its forecasts for economic growth and tax revenues will swell.

It’s a fair assumption. But it’s also worth considering that in the event of "No Deal" the OBR would do the opposite and with profoundly negative consequences.

In summary: a Brexit/Deal Dividend is unlikely to arrive in time to finance the end of austerity. If one arrives at all.

Watch the Budget live on itv.com/newsfrom 3.30pm on Monday.