World

UK shelves much of its austerity plan in first spending blueprint since Brexit

A rally at the Old Palace Yard in London on Wednesday called on the government to stop all attempts to interrupt Brexit.

HAYOUNG JEON/European Pressphoto Agency

A rally at the Old Palace Yard in London on Wednesday called on the government to stop all attempts to interrupt Brexit.

LONDON — After years of tough spending curbs, Britain’s government on Wednesday cast aside the language of austerity as it acknowledged the high economic cost of withdrawal from the European Union and tried to placate struggling working-class families whose incomes have stagnated.

A pledge by the previous chancellor of the Exchequer, or finance minister, George Osborne, to balance the budget by 2020 has been shelved. Instead, the current chancellor, Philip Hammond, is replacing it with a vaguer ambition to do so as soon as practical after 2020.

Advertisement

Help for workers whose low earnings are supplemented by welfare payments, an increase in the minimum wage, and new infrastructure spending were features of the first spending plan from Hammond, who became chancellor in July.

Changes centered on a section of society identified by Prime Minister Theresa May as those “just about managing,” who are thought to have voted in large numbers for British withdrawal from the European Union, or Brexit, in the June 23 referendum.

Get Today's Headlines in your inbox:
The day's top stories delivered every morning.
Thank you for signing up! Sign up for more newsletters here

Hammond laid out plans to finance construction of 40,000 affordable homes and to provide more help with child care, although there was also a less welcome increase in the tax on insurance premiums.

And there is a bigger catch. For all Britons, the specter of nation’s withdrawal from the European Union hovers over the economy. The uncertainties of the situation complicate life for Hammond and threaten to hit living standards just as they were beginning to improve for some.

While Brexit has not had the immediate negative effects some economists predicted, Hammond revealed lower growth projections and higher borrowing estimates and inflation forecasts.

Advertisement

“Our task now is to prepare our economy to be resilient as we exit the EU,” Hammond told lawmakers.

One of the Cabinet’s steadiest, and most sober, performers, Hammond is nicknamed Spreadsheet Phil because of his reputation for approaching politics more as an accountant than a visionary.

He was moved from his post as foreign secretary to become chancellor shortly after the June referendum. He, like May, had argued against Britain’s withdrawal.

That has made him a target of ideological opponents on the right of the governing Conservative Party, who want to speed British withdrawal, fearing that their goal of a swift, clean break with the European Union will be betrayed.

After Hammond warned in television interviews on Sunday of a rocky outlook and an economy with an “eye-wateringly large debt,” supporters of the withdrawal accused him of relentless negativity.

On Wednesday, official forecasts suggested that he was correct and that the nation’s debt would rise to more than 90 percent of gross domestic product in 2017-18 from 84.2 percent last year.

Despite the positive economic signs so far, forecasts from the independent Office for Budget Responsibility underscored the high price Britain is likely to pay for Brexit over the next five years.

During that time, potential growth will be 2.4 percentage points lower than would have been the case, Hammond said. Over the five-year forecasting period, around $75 billion of a total of $150 billion in additional borrowing can be attributed to Brexit.

Driven by the steep fall in the value of the pound, inflation is coming back. “We expect the pound’s fall to add almost 2 percent to the level of consumer prices over the next two years,” said the Office for Budget Responsibility, adding that “real earnings growth will consequently fall close to zero next year.”

It added that, overall, “the government has opted neither for a large near-term fiscal stimulus nor for more austerity over the medium term.”

May plans to invoke withdrawal talks, which are scheduled to last two years, before the end of March, but uncertainty over the future trading environment seems to be chilling inward investment and reducing tax collection.

British businesses have been jittery since the referendum.

Britain faces some long-standing economic difficulties. According to a research note from three economists at Bank of America Merrill Lynch, those include “woeful productivity performance, the already probably undeliverable austerity that is planned in day-to-day government spending, and the large long-term deterioration in the finances that will result if the government delivers on its plan to reduce migration to the tens of thousands.”

Overall, they added, “Brexit means, eventually, higher taxes, lower government spending, or permanently higher borrowing.”

Loading comments...
Real journalists. Real journalism. Subscribe to The Boston Globe today.
You're reading  1 of 5 free articles.
Get UNLIMITED access for only 99¢ per week Subscribe Now >
You're reading1 of 5 free articles.Keep scrolling to see more articles recomended for you Subscribe now
We hope you've enjoyed your 5 free articles.
Continue reading by subscribing to Globe.com for just 99¢.
 Already a member? Log in Home
Subscriber Log In

We hope you've enjoyed your 5 free articles'

Stay informed with unlimited access to Boston’s trusted news source.

  • High-quality journalism from the region’s largest newsroom
  • Convenient access across all of your devices
  • Today’s Headlines daily newsletter
  • Subscriber-only access to exclusive offers, events, contests, eBooks, and more
  • Less than 25¢ a week
Marketing image of BostonGlobe.com
Marketing image of BostonGlobe.com