Dear Philip Hammond, ignoring the chaos of Brexit in the Spring Statement won’t make it go away

The chancellor’s leaked plans for Wednesday’s statement make him appear fiscally irresponsible when it comes to the inevitable economic disruption of leaving the EU

Wednesday’s Spring Statement will be sandwiched between two important votes on the Brexit deal. It’s been widely briefed that the chancellor intends to use the statement to offer MPs a choice: block May’s deal, and a £20bn war chest will be used to counter the economic hit of a no-deal Brexit; vote May’s deal through, and that money can be used to end austerity.

This is a false choice. In either scenario, the chancellor is proposing spending an additional £20bn on a mix of public services, tax cuts and investment.

Setting the level of spending without regard to Brexit and the kind of Brexit that takes place is fiscally irresponsible.

In the event of a no-deal Brexit, the government’s own analysis suggests a drop in GDP of 7.7 per cent, or almost twice what the UK experienced in 2009. With interest rates at their lower bound, the government would in that scenario need to be ready with a large fiscal stimulus.

That would need to include ending austerity, which has been counterproductive and shown to reduce the size of the economy by £100bn over the past decade, as well as investing for a stronger economy. The Institute for Public Policy Research (IPPR) Commission on Economic Justice argued that we need around £20bn additional investment in the economy just in normal times to keep up with our peers.

The policies that have been leaked so far suggest the Spring Statement will be business as usual in terms of where spending is allocated. In taking this approach, the chancellor is not just ignoring the prospect of Brexit but also its causes.

Over the weekend, the government announced £200m of investment in genetic research and laser technologies in Cambridge, Edinburgh and Oxford. Investing in the UK’s exporting industries will be an important source of GDP growth. However, the chancellor’s investment choices should instead be assessed by where in the country the investment is taking place, how much is on offer and what the investment is in.

Unless investment measures are vastly more substantial than suggested, on all three counts this is an inadequate response to the Brexit vote.

First, in investment terms, these are not huge sums. The government has rightly committed to increasing investment substantially, and has the fastest growth rate of investment in the G7 – albeit from a low base. But to do so, and to use investment to bolster the economy following Brexit, will require more and larger shovel-ready investment projects.

Second, Brexit brought to the fore the legitimate grievances of many regions and communities around the country which have suffered decades of underinvestment. Over the past four decades, policymakers have prioritised an easy boost to GDP figures through investment in the capital and the southeast, rather than pursuing balanced growth. The recently announced Stronger Towns Fund was widely disparaged as a pittance (£1.6bn over seven years) compared to the sweeping cuts to local government that have made it viciously hard for local authorities to keep their economies and communities afloat.

Investing in high growth, successful areas like Cambridge might make sense if GDP growth was the priority, but on its own it’s not an answer to the questions raised by the Brexit vote. An alternative approach would be to replicate the success of Cambridge around other universities: we are lucky to have many excellent universities that are well distributed geographically and which could spur more evenly spread growth.

Third, the government is choosing to invest the money in cutting-edge science. This cannot be the whole answer if the industrial strategy is to have an effect on the living standards of the majority. Our leading sectors and firms are performing well. They have the potential to expand, which could deliver strong GDP results. But if the government cares about wages and job growth – how the majority experience the economy – it must address low productivity in the firms that aren’t at the leading edge, and in low-pay sectors.

That means addressing low rates of adoption of technology, poor skills utilisation and weak management in the everyday economy.

The chancellor may use the Spring Statement to address these concerns. But the announcements so far suggest the government is not facing up to the potential economic disruption of Brexit. And in its choices so far, it’s business as usual. That’s a tough sell to voters tired of four decades of underinvestment, poor productivity and a trickle-down approach to regional inequalities.

Carys Roberts is a senior economist at the Institute for Public Policy Research