Philip Hammond has broken with the Treasury orthodoxy

Posted on November 27, 2016

Politics is a funny business. Sometimes politicians make bold claims to have torn up the conventional wisdom while taking timid steps that barely change anything. But other times the old dispensation is abandoned with little fuss or controversy. Usually this happens when believers have slowly lost their faith in an established doctrine and eventually it is abandoned without a fight. Philip Hammond’s Autumn Statement is a powerful example of this.

The UK chancellor’s low-key style understates the boldness of his challenge to the taboos which have shaped Conservative economic policy for years. He did not just absorb the fiscal impact of Brexit with higher borrowing. He then borrowed even more for infrastructure and research and development.

I welcome this but it is very different from the balanced budget commitment in the last Conservative manifesto. Mr Hammond abandoned the old fiscal rules and put in place some new ones that are unlikely to be a real constraint on his freedom of action. He shifted the balance of macroeconomic policy back towards fiscal policy, ending the mantra that has dominated thinking for years that only monetary policy has a role in supporting the growth of our economy.

The chancellor has also started to shift the balance between the generations after years when policy has favoured the old over the young. The government used to think that the way to help young people get started on the housing ladder was ever more ingenious financing packages. Now it is going to build more houses with a surge in direct investment for housebuilding. At the same time he has made it clear that the triple lock for pensioners will not necessarily be repeated in the next parliament.

The chancellor’s excellent initiative to put more funding into R&D to promote innovation is another significant shift. Margaret Thatcher had a clear doctrine about the role of government in science and technology which she set out in her memoirs.

“Government should concentrate on funding basic science and leave its application and development to the private sector. But I … felt deeply uneasy about any policy that threatened to starve pure science of funds.”

It was not the job of government to support near-market research. As a result, the Thatcher administration swept away a lot of the funding, arguing that it should be provided by business. Public R&D labs were closed or privatised and then disappeared in pursuit of this doctrine.

But many businesses were not willing to take on this more ambitious role in R&D as they could not see the direct commercial benefit. British commercial R&D spending fell alongside this withdrawal of government support. This failure was then seen by Conservatives as evidence that British business lacked the guts to take risks, unlike entrepreneurs in America. The attack by Liam Fox, the international trade secretary, on British business for lacking the energy to export is a late survival of this jaundiced view.

But gradually the Conservatives came to see that there is a significant role for government in the long journey of a technology from lab to market. It is not that British business is risk averse; it was that we were expecting them to bear more risk than in the US.

It is a legitimate role of government to bear risk. It is what they do in America where it is their strategy that there should be no significant technology in which they do not have a global position. The 12 months after the 2015 general election saw an attempt to cut or close many of the initiatives that constituted an emerging industrial strategy.

In particular, there was a disastrous cut in the budget for Innovate UK, the key agency with this role. It was the last gasp of the old doctrine. The embrace of industrial strategy by Theresa May’s government is a welcome creation of a new model.

A further challenge to the orthodoxy by Mr Hammond — and here he has rightly picked up where his predecessor George Osborne left off — concerns the long-held Treasury view that local government should not have a role in determining the economic fortunes of our country. Thirty years on from the abolition of the Greater London Council by the Thatcher government the chancellor announced significant new powers for London, which form part of a wider package of devolution as a first generation of metro mayors seek elected office.

There is a further twist to the story. It comes with the weakening of the British commitment to another Thatcher project.

The European single market was designed by Arthur Cockfield, her dry-as-dust Treasury minister who encoded the doctrine of a limited role for government in the EU’s state aid rules.

Contrary to the rhetoric, it meant the European single market rested on a more limited role for government than was the case in the US. The Brexit vote has eased that constraint and another barrier has fallen. Now we really are going to have to work out for ourselves what government can or cannot do to promote the industries of the future.

The writer is executive chair of the Resolution Foundation

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