Philip Hammond has warned two Conservative leadership candidates that their spending plans cannot be funded if the UK crashes out of the EU without a deal. He issued doubts over Boris Johnson's and Jeremy Hunt's plans in a tweet that said a no-deal scenario would blow a hole in the public finances, erasing the next prime minister's spending firepower. Both candidates have said they are willing to leave without a deal.
While Hunt has promised to earmark £6bn of additional government spending on emergency funds for the fishing and farming industries, and help for small businesses in the event of a no-deal Brexit, frontrunner Johnson said that he would spend about £25bn of "fiscal headroom" built up by the chancellor in the public finances to fund his spending plans, including a fresh promise to unfreeze public sector pay increases.
Hammond had allocated £26.6bn at the last budget for either ending austerity or boosting the economy in the event of a no-deal Brexit. Although it has often been described as a spending war chest, it would mean a rise in borrowing. Hunt was challenged over Hammond's warning after delivering a speech in Westminster about his £20bn plan for no deal, which he acknowledged would represent "one of the largest fiscal and regulatory stimuli the country has seen in decades."
He said, "I am the cabinet minister who is in a government who has had to make the most painful cuts in public spending, across public services, where all of us felt the pain of what was happening very personally. We took those painful decisions. We put the economy back on its feet. And so we will never throw that fiscal responsibility away, because its essential for our prosperity."
Hunt added, "But as a result of that, we have built up headroom, which makes it possible to make the commitments I am making today whilst sticking to our plans to reduce the deficit and reduce our national debt as a proportion of GDP." This stands in a stark contradiction to Hammond's insistence that the "headroom" would be wiped out by a no-deal Brexit, which the Treasury expects to hit economic growth and thus tax revenues.
Hunt added, "When you face an economic shock, it is just basic economics that you find support for the industries that are affected. It is temporary support, but it allows them to change their business models – to adapt." The Institute for Fiscal Studies tax thinktank had warned even before the £20bn pledge that Hunt's package of tax cuts and spending plans, which include a 25 per cent increase in defence spending, would "amplify the long-run challenges facing the UK public finances."
IFS director, Paul Johnson responded to the candidates' latest spending plans, and said, "Every time they put forward another tax cut or spending increase they are saying they are willing to increase borrowing without telling us by how much." He said Hunt's protection for farmers and fishermen ignored the impact on consumers, who would probably have to pay much more for their weekly grocery shop. "Our research found that famers do relatively well even when tariffs increase because they can charge more to domestic customers. It is the consumer that loses out."
UK government borrowing is currently 1.2 per cent of GDP. The £26.6bn represents a rise to about two per cent of GDP, a level targeted by Hammond. While the chancellor has previously said the funds could be used under an orderly Brexit to end austerity, the Tories committed in their manifesto to remove the deficit entirely by the mid-2020s – two targets viewed as incompatible by many economists. He has previously warned the candidates not to squander the party's record of managing the public finances.
Hunt said he would seek to begin exploratory discussions with EU leaders in July and cancel August leave for civil servants in a bid to "ramp up" no-deal preparations. He promised to make a decision by 30 September, less than two months after the new prime minister is due to take office, on whether a better deal with the EU was within reach. If not, he promised to “focus the whole country’s attention on no-deal preparations.”