Chancellor’s claim undermined as rapid slowdown in GDP growth is revealed
Richard Partington Economics correspondent – The Guardian
Philip Hammond’s claim that Britain can reap an economic dividend from Theresa May’s Brexit deal has been flatly rejected by MPs, as official figures confirmed the UK has suffered its worst year for GDP growth since 2012.
In a highly critical report, the Treasury select committee warned that the chancellor’s claims of a “deal dividend” if Britain avoided a no-deal exit lacked credibility.
The criticism came after data on Monday showed the economy grew by just 0.2% in the final three months of 2018, down from 0.6% in the third quarter. The fourth-quarter figures contained signs of an even sharper slowdown, with the economy posting a decline of 0.4% in December amid signs that Brexit uncertainty is taking hold.
For 2018 as a whole, GDP growth slipped to its lowest since 2012, at 1.4%, down from 1.8% in 2017.
Nicky Morgan MP, the Conservative chair of the committee, said Hammond’s “dividend” claim, at the Conservative party conference last year, had already been undermined by the government’s independent forecaster, the Office for Budget Responsibility. The OBR had told the committee the dividend was not an economic boost so much as “avoiding something really very bad” in the form of a no-deal departure.
“The OBR already assumes an orderly Brexit, so there won’t be a ‘deal dividend’ beyond the forecast just by avoiding no-deal. Business confidence may improve with increased certainty, but it’s not credible to describe this as a dividend,” said Morgan.
The OBR has made a smooth departure from the EU a key part of its forecasts, which prompted the Treasury committee to state there is no evidence of an economic boost from supporting the deal over and above those central estimates.
Hammond has repeatedly suggested that, should parliament throw its weight behind Theresa May’s Brexit plan, it would generate a dual economic boost for the country by lifting the fog of uncertainty blocking businesses investment, while also allowing him to spend public funds held in reserve for a no-deal scenario.
Reacting to Morgan’s comments, Treasury insiders dismissed the suggestion that Britain would not see a deal dividend from MPs supporting the prime minister’s Brexit plan, as it would give firms more clarity about the future trading relationship between the UK and the EU.
“The chancellor has been clear that when we agree a good deal we will harvest a deal dividend. This is because businesses will have the certainty they need to invest, grow and create jobs which will improve the public finances,” the source said.
Most economists believe that Britain agreeing a Brexit deal with Brussels would help to give firms clarity for the future, potentially unleashing projects that have been put on hold due to the uncertainty.
Amit Kara, the head of UK macroeconomics research at the National Institute of Economic and Social Research, said: “It could be a dividend as all we’re saying is we’re moving from an acute phase of uncertainty to remaining within the EU for at least the next two years.”
He added: “The dividend is just because of the mess at the moment.”
The committee’s intervention undermines one of Theresa May’s key arguments to persuade MPs to back her withdrawal agreement with less than 50 days to go before Brexit. It also comes as the British economy shows increasing signs of stress as the deadline for the article 50 process looms ever closer, causing more business to put their plans to invest in Britain on hold.
Growth figures from the Office for National Statistics revealed that business investment in the final three months of 2018 declined sharply. Corporate spending tumbled for the fourth successive quarter – falling by 1.4% in the final quarter of 2018 alone – for the first time since the 2008 financial crisis.
Companies have intensified their contingency planning to cope with the possibility of a disruptive Brexit. Car manufacturers are stockpiling parts, banks have moved employees to Ireland and continental Europe and two Japanese electronics firms, Panasonic and Sony, have moved their EU headquarters to mainland Europe.
Labour and trade unions called on the prime minister to remove no-deal Brexit as an option in order to shore up confidence in Britain, something which May has so far refused to do in negotiations with Brussels.
Frances O’Grady, the general secretary of the TUC, said: “The prime minister’s failure to rule out a no-deal Brexit is harming confidence in the economy and holding back growth. With our manufacturing sector in recession, the prime minister must act now to remove the threat of crashing out.”
GDP growth in December plunged into reverse, with a broad-based slump across each of the key sectors for the economy. The manufacturing sector, which makes up about a tenth of the economy, fell into recession, with six months of negative growth in the longest negative run since September 2008 to February 2009, the depths of the financial crisis.
The monthly decline GDP of 0.4% helped drag down quarter-on-quarter GDP growth to a rate of 0.2% in the three months to the end of the year, slightly below the Bank of England’s expectations and down from a rate of 0.6% in the third quarter.
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While the slowdown mirrors a loss of momentum in the world economy, including a deterioration in the eurozone, most analysts believe that unique challenges from Brexit have further hindered UK growth.
Ben Brettell, a senior economist at Hargreaves Lansdown, said: “There’s little doubt Brexit uncertainty is responsible for the disappointing numbers, though concerns over global trade will also have played a part.”
The committee also warned that Hammond’s deficit reduction target – to eliminate the gap between government spending and income by the early part of the next decade – now lacked credibility. Britain crashing out of the EU without a deal is expected to come with significant negative consequences for the public finances, with potential for the deficit to widen.
Hammond opted at the last budget to raise public spending, with a £20bn a year increase for the NHS by 2023-24, without making significant tax increases to balance the books.
Referring to that decision, the committee said: “The government’s fiscal objective has no credibility and should be replaced.”