Austerity Is Over, Britain Says, Despite Brexit Uncertainty

Austerity Is Over, Britain Says, Despite Brexit Uncertainty

Austerity is “finally coming to an end,” Britain’s chancellor of the Exchequer, Philip Hammond, declared on Monday as he outlined new public spending. But he warned that financial plans could change if Britain does not reach a deal on withdrawing from the European Union.

Delivering his final budget speech before Britain’s scheduled exit from the bloc next March, Mr. Hammond announced a tax on multinational digital giants that have been widely criticized for paying little taxes in many European nations.

But his big political message was a promise to end a long-running squeeze on public spending with an injection of extra money for health, education, defense and even for repairing potholes on highways. The amount employees can earn before they pay income tax will also rise, helping increase take-home pay.

Nevertheless, British politics is overshadowed by the withdrawal, known as Brexit. Negotiations over it are stalled in Brussels, and without a deal, Britain would face a damaging “cliff-edge” departure in March that could leave ports clogged and disrupt supply chains. Investment has fallen off recently, as companies delay or cancel decisions because of the uncertainty.

Mr. Hammond told lawmakers that if Britain could strike a deal with the European Union, there would be a “double Brexit dividend” as certainty returns, and that the government has the leeway to spend money being held back as a contingency in case of a chaotic departure next March without any deal.

But Mr. Hammond’s financial plans are generally based on the assumption that Britain negotiates the type of exit he wants from the European Union: not only a smooth departure, but one that maintains close economic ties to the bloc. On Monday, he said that as a precaution he was “retaining firepower to intervene if the economy needs more support,” and that, if the outlook changes, he might hold another full budget in the spring.

Hard-line Brexit supporters within Mr. Hammond’s Conservative Party want a cleaner break with the bloc, and some are threatening to vote against any Brexit deal that ties Britain too closely to the European Union. So his comments will be seen as a reminder to them of the economic — and political — consequences of anything that risks an orderly departure from the bloc of the type he wants.

They know that Britons are weary of years of cuts to key public services that were introduced as the country battled to stabilize its finances following the financial crisis. Indeed, many analysts believe the vote for Brexit was partly a reaction to austerity policies, particularly in areas of the country that did not benefit from globalization.

Critics argue that Mr. Hammond is still not planning to be aggressive in reversing those policies, and that some cuts will continue, particularly to capital spending.

“Austerity is not over,” said Jeremy Corbyn, leader of the opposition Labour Party, who added that it had caused “real hardship to millions of our citizens.”

Though the British economy has slowed, it is still growing and Mr. Hammond still has room for maneuver because tax receipts have come in higher than predicted. That has allowed him to honor pledges made by Prime Minister Theresa May, who had already promised a significant increase in spending to reduce the pressure on Britain’s overstretched National Health Service.

Mr. Hammond said the budget deficit would be less than 1.4 percent of the total budget next year, with borrowing this year 11.6 billion pounds, or $14.7 billion, lower than was forecast in the spring. Next year’s growth forecast was upgraded to 1.6 percent from 1.3 percent.

But over all, the picture is not so rosy. Debt remains high, at around 84 percent of gross domestic product compared with around 34 percent in 2001, and productivity growth remains stubbornly low.

According to the Center for European Reform, a research institution based in London, the British economy is 2.5 percent smaller than it would be if the country had voted to remain in the European Union.

Among other announcements on Monday was more money to cushion the impact of a new system of welfare payments called universal credit that critics say is pushing some people into acute poverty.

Mr. Hammond also promised a tax on some plastic packaging and investment in Heathrow Airport in London so that electronic passport gates could be used by visitors from the United States, Canada, New Zealand, Australia and Japan.

One of the biggest announcements was of plans for a new digital services tax directed at large technology companies that pay relatively little tax in Britain.

“A new global agreement is the best long-term solution,” Mr. Hammond said.

Details of the proposed levy were scarce, but Mr. Hammond said he planned to introduce it in 2020 and that the annual revenue would be around £400 million.

“I emphasize that this is not an online sales tax on goods ordered over the internet,” he said, adding that Britain would continue to work with the Organization for Economic Cooperation and Development and the Group of 20 economies to seek a globally agreed solution for taxing such companies.

“If one emerges, we will consider adopting it in place of the U.K. digital services tax,” he added.

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