Weak Tea After Brexit

The May government’s additional spending won’t spur growth.

The Wall Street Journal

Nov. 23, 2016 8:47 p.m. ET


Theresa May’s government delivered another budget statement Wednesday, and we’re pleased to report that not all of the proposals are bad. But whether not-so-bad is good enough to give the economy the boost it will need to power through Britain’s exit from the European Union is another question.

Regarding the good, the best headline to come out of Chancellor Philip Hammond’s Autumn Statement is that the government intends to stick to its schedule for corporate tax cuts, with rates falling to 17% in 2020 from 20% today. That’s down from 28% under Labour Prime Minister Gordon Brown and would be roughly half the rate paid by companies in France and Germany. Mrs. May has also indicated she’s prepared to come down below 15% if necessary.



The lower rate ought to curb any enthusiasm that multinational firms with headquarters in the U.K. might have to relocate to Paris or Frankfurt post-Brexit. Also good news is that the new administration is sticking to its predecessor’s habit of combatting bracket creep, raising the threshold at which the 40% rate of personal-income tax kicks to £50,000 ($62,000) from £43,000.

Then there’s the not-so-good. Personal-income-tax rate reductions that would improve the incentives to save and invest remain off the table. The national minimum wage will increase to £7.50 next year from £7.20 at the same time that employers are buffeted by rising import costs from a weaker pound and uncertainty about post-Brexit international trading arrangements. All that and more on top of Mrs. May’s nonfiscal promises, such as stricter immigration policies.

Then there are the Keynesian sweeteners, including a £23 billion, four-year National Productivity Investment Fund to invest in housing and R&D, among other things. There also will be billions of pounds for roads and bridges, public transport, low-emission cars and other state-subsidized projects of marginal economic utility.

This new spending is of a piece with Mrs. May’s promise, at the Tory party conference, to lead a government that “steps up, and not back” to “correct unfairness and injustice” in the markets. One victim of the spending is former Chancellor George Osborne’s pledge to balance the budget by 2020. Net government borrowing is due to increase by £122 billion over the next five years compared to the estimated borrowing in the budget Mr. Osborne released in March.

This would be a minor regret if all the new spending boosted growth. The problem is that it won’t. The Autumn Statement predicts growth will fall to 1.4% for 2017 and 1.7% for 2018, compared to the previous estimates of 2.2% and 2.1%. That ought to concentrate minds at Westminster, especially considering that growth usually underperforms government estimates. That means Mr. Hammond’s budget risks the worst of both worlds: Low growth along with sharp increases in government borrowing when Britain’s debt-to-GDP ratio is already heading toward 90%.

All this sets up the risk that Britain will march through Brexit with a low-growth, big-deficit economy, one in which personal taxes still are too high, a weak currency depresses domestic consumption by driving up import prices, and a dense web of regulations deters investment. If that really is Mrs. May’s best plan for Brexit, it’s going to fail.

Mrs. May and Mr. Hammond still have opportunities to avoid that outcome and make a success of Brexit. That will require offering more than the weak tea of this week’s Autumn Statement.