End of part one

The news early this morning that the EU has agreed that “sufficient progress” has been made following the first phase of Brexit negotiations was initially met with a positive market response. But with sterling eventually weakening in the course of the day it is evidently not being seen as a panacea for all Brexit ills. Whilst there was compromise on both sides, the UK has moved far closer to the EU’s initial position, particularly on the question of the exit bill, which is pretty much what we thought would happen all along. Meanwhile, the Irish border question has been kicked down the road for now.

With regard to the bill, the official document released today did not attempt to put a figure on the final cost but it is estimated that the UK will pay a net amount between €40-60bn over a multi-year horizon (we assume €50bn for the sake of argument). It will also continue to pay into the EU budget in 2019 and 2020 as if it were still a full EU member. On the basis that the annual net cost of membership is around €8bn per year, this implies that around one-third of the net exit bill will be paid by 2020. But this still means that the UK will have to find an amount equivalent to €35bn after 2020 – the equivalent of 4-5 years of full membership. In practice, it will have to pay a lot more up front. Some of the reimbursements, such as the share of European Investment Bank assets, will only be repaid over a twelve year period beginning in 2019.

The fact that the UK will continue paying into the budget until 2020 resolves a major headache for the EU, since this allows it to meet all obligations in the current budget cycle which would otherwise have been interrupted had the UK ceased to pay in 2019. But it is bad news for the UK, which will become a rule taker whilst still continuing to pay full membership fees. The UK is thus moving towards the Norwegian option – at least in the short-term – which I pointed out in the immediate  aftermath of the referendum was the worst option because it imposes all the same costs without the benefit of being able to influence the rules.

It is unlikely to be a long-term solution, however, with the EU increasingly of the view that a Canadian style free trade agreement is the most plausible option. Whilst such an outcome will offer largely tariff-free trade in manufactures, replication of the Canadian option implies some tariffs would remain on agriculture and it would permit no access to EU FTAs with only a partial liberalisation of services. Moreover, there would be no financial services passporting. But it will take many years to hammer out such a final deal – do not be surprised if the EU and UK seek to extend the Norway option for another two years to 2023 whilst they continue to work on the details of the final arrangement.

Earlier this week, the Irish border question threatened to derail any prospect of reaching a deal today. No resolution was offered this morning. The issue has merely been kicked down the road. Indeed, the problem of avoiding a hard border remains incompatible with leaving the customs union and single market, and the best that the two parties could come up with was that if they fail to resolve the terms of their future relationship, the UK will maintain “full alignment” with the EU internal market and customs union rules which “now or in the future” are important for preserving north-south trade. Despite the DUP’s recent objections to treating Northern Ireland differently to the rest of the UK, that in effect appears to be what is being proposed in the absence of an alternative.

What to make of it all? Firstly, we should welcome today’s events as a first sign that progress towards a trade deal – and ultimately a softer Brexit – has been made. But it comes at a price: the UK has capitulated in the face of the EU’s demands, thus rendering irrelevant the six months of bluff and bluster by Brexit supporters. In no sense has the UK taken back control: Indeed, quite the opposite since the Norwegian solution implies giving up lots of control. Nor has it freed up the additional funds that were promised to the NHS (£18bn per year if you recall).

But it could have been worse. The Brexit Secretary finally admitted this week that “no economic impact study had been undertaken before the cabinet decision to leave the customs union and no assessment had been made of the possible economic effect of a no-deal Brexit”. At least they now have the time to do some impact analysis to assess the costs of Brexit. One of the arguments often used by Greek and Italian citizens for remaining in the EU is that it forces their politicians to act responsibly. Today’s deal may have given UK politicians a lifeline they were too disorganised to find for themselves.

The cracks are showing

If ever any Brit needed reminding of the absolute indifference with which the rest of Europe views the tedium of Brexit, a glance at most European newspapers this morning would have provided it. The failure by the British government to reach a deal on the Irish border issue dominated the UK news but received scant coverage elsewhere. The travails of Donald Trump were the biggest item on most non-English language newspaper websites, demonstrating what happens when lunatics run big asylums rather than the small scale takeover we are witnessing at home. Indeed, there are plenty of significant issues going on elsewhere: The fact that Germany has not yet formed a government, almost three months after the election, is a reminder that other countries have their own political issues to deal with.

We should thus not be under any illusions that Brexit is anything other than a peculiarly British problem and as such requires a domestic solution. But finding a solution depends on being able to identify the problem. Whilst the Brexit ultras try to blame the perfidious EU for making life difficult, ultimately the issue boils down to ineffective domestic government which makes resolution far harder. But whilst I have been critical of Theresa May's handling of many aspects of Brexit, I do have some sympathy for the fact that she inherited a mess bequeathed by her predecessor. Brexit involves trying to reconcile a series of mutually incompatible positions whilst convincing the electorate that both something and nothing has changed, and at the same time trying to prevent the fissures at the heart of government from growing larger. The near impossibility of this task serves to remind us that advocates of Brexit either deliberately lied about the ease with which it could be achieved, or perhaps even worse, could not see the difficulties involved.

Much as I may have railed against last year's decision, I have never called for a second referendum. Partly because I don't think it will resolve anything, but perhaps because I have secretly believed that the difficulties in delivering a Brexit that works for the UK are so insurmountably large that it could yet come back onto the agenda of its own accord. I have little doubt that the current government is unable to deliver the "red, white and blue Brexit" promised by Theresa May. For one thing, a task of this magnitude requires a government with a common purpose but this one contains too many members with differing positions. Worse still, the government is unable to command a working parliamentary majority and as it learned to its cost yesterday, that is an impossible position from which to win a deal on Ireland.

But Brexit obscures a bigger truth. The referendum last year was a vote against the status quo. As a consequence we should not be surprised to find that the old political methods are failing to find a solution. The conventional politicians who populate the Conservative and Labour parties, and who we can broadly class as the political centre, represent the status quo against which the electorate voted. It is no wonder that they cannot imagine a solution because they cannot conceive of a world in which the old rules no longer apply. In many respects I am in the same boat although my position is based on the evidence that suggests whatever comes next will not match the deal with the EU that we have now.

Clearly, it is me who is out of tune with the Zeitgeist. But I may be wrong: After all, there is no reason why the post WWII settlement must continue to hold after more than 70 years. But precisely because half the electorate shares a similar opinion, Brexit can never work on the terms set out by its proponents. It will deliver a highly Pareto inefficient outcome because it cannot make anyone better off without making others worse off. This is not wholly a monetary issue. If we end up in a world where Britain distances itself from the values which have characterised its past, and those which large parts of Europe still hold, then this is for many (myself included) a regression to a sub-optimal position.

So how can Brexit be made to work under such circumstances? First off, it probably requires a political leader with near-unanimous support who can convince the electorate that Britain has a future outside the EU but that it still shares the EU's underlying goal of ensuring peace and prosperity across the continent. There certainly isn't anyone in the current generation of politicians with that sort of broad appeal. The closest any politician in my lifetime came to having the X-factor was Tony Blair, and look how that turned out. Thatcher never had it. Nor did Winston Churchill who, lest it be forgotten, was so revered by a grateful public that they rewarded him with an election defeat in 1945. In that light it is hard to imagine that Jeremy Corbyn is a viable political alternative, even though he offers a radically different economic policy.

In the absence of the requisite leadership, is there any other way that Brexit can be made to work? I suspect the answer boils down to cold, hard economics. If the UK economy can generate prosperity in which the electorate can all share, they may be prepared to accept life outside the EU - albeit grudgingly. But as most of the economics profession (and all reputable economists) have pointed out, leaving the EU on the terms specified by the government simply cannot generate that prosperity because it entails giving up many of the economic advantages we currently enjoy, such as membership of the single market.

Having established that we don't have the political leadership and that the economic conditions for a successful resolution are unlikely to exist, I am not the only one struggling to understand how Brexit will work. It certainly will not be the success which the Brexit-at-any-price brigade believes. But then I have been saying this for nearly five years and nothing that has happened so far has been enough to persuade me I am wrong.

Bitcoin: A currency whose time has not come

If anybody needed confirmation that Bitcoin is a bubble waiting to burst, consider this: It took seven years since it started trading for it to cross the $1000 threshold, which it did in January this year. Four months later, in May, the price surged through the $2000 level. By August, it broke the $4000 barrier and … well, you get the picture. It takes ever less time to go through each successive $1000 level. Just after 1am London time this morning, it broke the $10,000 threshold for the first time. Thirteen hours later, it reached an all-time high of $11,434 and less than six hours later it was way back down, at just above $9000.

If you draw a daily chart of Bitcoin moves, this is a trend which will not show up. But these are the sort of market movements that are hard to resist – everyone loves a good boom, and before too long it is a pretty safe bet that there will be a bust from which there is no coming back. Aside from the fact that any asset which rises at such a speed almost inevitably comes crashing down again, there are numerous ironies associated with Bitcoin which make it unsuitable to be the great alternative to central bank controlled cash that its proponents claim.

Consider the fact that its initial popularity was derived from those who believed the best form of protection against an imminent collapse in civilisation was to live in a remote cabin in the woods with plenty of tinned food and a well-stocked armoury. The theory ran that central bank cash would soon become worthless as societies collapsed and alternative forms of money would come into their own. There is just one snag. Bitcoin is an electronic token which exists only on a computer. In the event that civilisation were to collapse, who would be there to keep the lights on – or more pertinently, generate the electricity required to ensure that Bitcoin could continue to be traded?

To understand why all this is an issue, we need to go to the heart of what Bitcoin is. It was designed as a peer-to-peer electronic cash system to cut out the conventional banking system. In order to make this work, transactions between holders of Bitcoin are recorded on a digital ledger known as the blockchain. In a conventional banking system, the ledger is a record maintained by the banks. To bypass this step, a ledger technology was created in the form of an electronic file which records all transactions in sequence, so we can see how title to Bitcoin passes from one holder to the next. In the absence of a centralised record keeper, it is important to ensure that people are not cheating (i.e. claiming to own Bitcoin to which they are not entitled). This is done by timestamping each transaction and linking it to each previous timestamped transaction in the form of a chain. In this way, we can trace back all transactions – there are no secrets.

But transactions are only added to the chain after a complex proof-of-work algorithm has been solved. Due to the transparency of the system, falsifying the current transaction would require falsifying all previous transactions, and because the proof-of-work algorithm is computationally onerous, there is little incentive to cheat – it is simply too expensive in terms of time and transaction costs. So once you solve the cryptographic puzzle and all users agree the solution is valid, one iteration of the proof-of-work algorithm suffices to ensure the blockchain is valid. Bitcoin comes into the equation because those who maintain the blockchain, and do the complex calculations, are rewarded by payment of Bitcoin. An additional complication worth knowing is that the supply of Bitcoin is limited to 21 million, and almost 80% of all coins likely to come into existence have already been created. Moreover, miners get progressively lower rewards for each block they “mine.”

Having completed that diversion, it raises two issues. First, the electricity requirements to run the blockchain and mine Bitcoins are enormous. Because of their increasing scarcity, miners have to expend more energy to generate each additional Bitcoin – it is an energy-inefficient process. Currently, this activity consumes as much electricity as the Turkmenistan economy and estimates suggest that by 2020 it could consume as much as Denmark. Second, the real bonus of the system is that the blockchain is applicable to a wider range of activities than Bitcoin. The real reason why Bitcoin has surged this year is that investors have been bringing blockchain-related products to market via initial coin offerings. But the Ethereum network, which is an open-source, blockchain-based platform designed for a wider range of applications and in which the digital currency (Ether) is derived as a by-product of the verification process, has been one of the fastest growing currencies this year.

Policymakers have taken note of the recent bubble with the BoE’s Jon Cunliffe reassuring the public in a radio interview this morning that it is too small to hurt the wider economy. Indeed, the global market cap of all digital currencies currently stands at $283 billion – less than 0.5% of world GDP. But central bankers have taken note of digital currencies and have been thinking about central bank controlled cryptocurrencies for quite a while (I will deal with this another time). I do believe that there is a future for digital currencies – it’s just that I don’t believe Bitcoin is the vehicle to take them forward.

The dawning realities of Brexit

If nothing else, the exceptionally weak growth projections released by the OBR on Wednesday should make people realise the scale of the economic challenges the UK will face in the wake of Brexit. It really ought to be the sort of wake-up call that forces people to ask themselves whether leaving the EU is such a good idea after all.

In fairness, the huge downward revision to growth, which now looks for real GDP to average growth of 1.4% per annum over the next five years, was triggered by a downward revision to productivity growth – not wholly related to Brexit. But the OBR did highlight that Brexit-related uncertainty was likely to impact on business investment and assumed that the UK’s “share of EU market in global markets would also fall.” The OBR, whether wittingly or not, provided a scathing indictment of the government’s failure to plan for Brexit: “We asked the Government if   it wished to provide any additional information on its current policies in respect of Brexit that would be relevant to our forecasts. It directed us to the Prime Minister’s Florence speech from September and a white paper on trade policy published in February. We were not provided with any information that is not in the public domain. As in our previous two forecasts, we have not therefore been able to forecast on the basis of fully specified Government policy in relation to the UK’s exit from the EU.”

In the course of this week I have become engaged in a couple of debates about the economic wisdom of Brexit. In the first instance, my interlocutor asked me why I hold the view that the UK needs a trade deal with the EU and why instead we should not simply forge trade deals with the US, China and India. I pointed out that the EU is the UK’s largest single trading partner and that countries located in close proximity tend to trade heavily, which is why the UK exports more to Ireland than to China and India combined. His follow-up question was why the rest of the EU would put up trade barriers against the UK. My response was that if we resort to WTO rules, this will be the default position and because those countries which export a lot to the UK will not be able to do a bilateral deal, we need one with the EU.

The second issue regarded the usefulness of economic forecasts with regard to Brexit, which was particularly appropriate in the wake of the OBR’s assessment. I pointed out that in broad terms the economy is now where most forecasters assumed it would be based on their pre-June 2016 Brexit scenarios. A-ha, said my correspondent, but didn’t most forecasters assume the end of the world in the wake of the referendum. I have to admit most of us were overly gloomy based on our post-referendum forecasts. But as I have noted before, these were made against a backdrop of huge uncertainty: (i) no effective government; (ii) the assumption that Article 50 would be triggered immediately (as David Cameron had indicated) and (iii) some dire survey evidence in the immediate aftermath of the referendum. If you look at what most forecasters (including the Treasury’s longer-term analysis) indicated in their pre-June projections, it was generally assumed that the UK would grow by between 0.5% and 1% more slowly than otherwise – a view which is now being borne out.

Admittedly, the Treasury did not help matters with the dire warnings contained in its publication warning of the short-term implications of Brexit. But most economists dismissed these as being over the top and in retrospect should be viewed as part of the much derided Project Fear. More generally, if we take a medical analogy, and assume that an overly-cautious doctor quarantines a suspected infectious patient, do we then cease to listen to all medical advice? On the whole, I am comfortable with the consensus economic view that, at least over the next couple of years, the UK economy will underperform relative to its developed world peers.

Regarding questions on Brexit, I do welcome the fact that people challenge my views and even if we are unable to persuade each other of our respective case, it is important to have a civil debate about the consequences. I am not sure of the extent to which buyer’s remorse has set in with regard to the Brexit vote. Some people may have changed their mind, though I suspect the numbers are small. But 17 months after the vote and with 16 months until the UK leaves the EU, the understanding of the implications and the degree of preparedness for what follows are shocking. Anger is currently directed at the media (even the pro-Brexit newspapers are focusing on foreign disinformation campaigns), whilst both Leavers and Remainers point the finger at each other (those Leavers arguing that if we all got behind Brexit we could make a success of it, really ought to engage their brain).

But the real culprits are in government. It was David Cameron who took the gamble and failed. It was the Conservative government which adopted a winner-take-all strategy in autumn 2016, and polarised the country rather than seeking to heal divisions. It was Theresa May herself who called an unnecessary election which weakened the government, allowing ministers to intensify their in-fighting. Not that the Labour Party are much better. A large chunk of those who voted for Corbyn in June as a protest against the pro-Brexit Conservatives seem not to understand that he has no  intention of halting Brexit. More damningly, the government has no plan for the future, as the OBR told us last week. Unless the EU takes pity on the UK and agrees in December to start trade talks, the outlook is starting to look pretty dire.

Budget round-up

In my day job, when called upon to provide commentary for clients, I essentially face two choices: Either inform them as quickly as possible, sure in the knowledge that you are not going to cover all bases, or provide the most in-depth piece looking behind the data for things that are not obvious at first sight. It is a difficult trade-off, particularly when you know that your better-resourced competition is capable of producing in-depth analysis at speed.

Analysis of the UK budget always falls into the category of issues where you know that there are nuggets waiting to be mined but if you spend too long looking for them, the commentary will soon be out of date. After all, the volume of material available online once the Chancellor’s speech has finished is huge. The OBR’s Economic and Fiscal Outlook is a guide to all aspects of the UK macro economy that you would ever need to know (and many that you didn’t). It is all a far cry from the days when the best we could do was run down to one of London’s mainline stations to pick up a copy of the Budget Red Book.

With some hours having passed since Philip Hammond presented his parliamentary statement, did I discover anything obvious that I missed? Nothing really springs to mind, although one nugget which jumped out at me after having looked through the EFO  was Box 2.1 on pp27-28 which highlighted that real GDP in 2012 is today assessed as being more than 2% higher than was measured at the time (see chart). This matters because the starting point against which forecasts were made five years ago was better than anticipated and goes some way towards explaining why the deficit in recent years has come down so sharply.

Turning to the overall content of the budget, much has been made of the significant downward revisions to the GDP growth forecasts, which constrain expected revenue growth and mean that the deficit at the end of the forecast horizon (extended to 2022-23) is projected at 1.1% of GDP versus 0.7% in March. So it’s been revised up a bit? So what? As I pointed out in a recent post, what really matters is debt stability and both the OBR’s and my own forecasts suggest that the debt-to-GDP ratio is likely to start falling in the next year or two. I would in any case be tempted to treat the significant downward productivity revisions with a degree of caution. It may not take much to persuade firms to slightly raise their capital investment and thereby substitute capital for labour, which may make the overall labour productivity figures look better. As the data revisions example shows, if current data are not measuring the true state of the economy accurately, this introduces major uncertainty into the fiscal projections.

Digging through the Budget Red Book, Table 2.1 suggests that today’s fiscal giveaways total £25bn over the period to 2022-23, with spending increases of £18bn and tax cuts of £7bn. Of the measures announced today, 30% is accounted for by additional NHS spending and a further 37% by measures to boost affordable housing. Almost a quarter is accounted for by pre-announced (but not costed) policy decisions and a further 12% from Brexit-related spending. The net effect of the remainder is small change. It all feels a bit underwhelming. Moreover, Table 2.2 indicates that £19bn will be clawed back from measures announced in previous budgets (with most of this occurring from a change in the discount rate applied to public service pensions). Thus the net effect of the fiscal plans announced today is minimal – £6bn over the next five years is peanuts – and clearly policy is not as bountiful on the surface as it appears.

This brings us to the politics of the budget. If the Conservatives hoped to deliver a big bang to impress the voters, they are going to be sorely disappointed and if Philip Hammond’s position was insecure ahead of the budget, I don’t see how it can be much more secure now. But it was the best he could deliver given the constraints under which he was operating. It is not the big bang package his party wanted and arguably he could have done more. Indeed, by pursuing the policy of corporate tax cuts and refusing to uprate fuel duties in line with inflation, there is some low-hanging fiscal fruit to be picked if he is serious about closing the fiscal gap. But to the extent that this budget was about trying to repair trust after the election, such items will have to remain hanging on the tree for now.

Assessing the strength of the tremors

Earthquakes are the result of long periods during which two tectonic plates rub against each other but are unable to smoothly slide over each other due to geological irregularities. But the pressure finally builds up sufficiently to force one plate to slide over the irregularity with such force that it releases energy in the form of a quake. They are generally unpredictable in terms of their timing and the impact of their devastation. But the forces triggering them take a long time to build – indeed, one could be forming under your feet right now.

So it is with economic events and today we have seen a couple of minor tremors which could be the prelude to a much bigger event. Let’s start in Germany where talks to try and form a coalition government finally failed yesterday after two months of fruitless negotiations. There are now essentially three options on the table: form a minority government; form a grand coalition with the SPD or call new elections. Chancellor Merkel does not appear keen on a minority government and the SPD apparently are not willing to repeat the experience of the legislative period 2013-17 when they were accused of being the CDU’s lapdog. And the option of new elections is not palatable to anybody, although Merkel sees it as the least worst option. Indeed, the shock triggered by the September result might cause those who voted AfD as a protest to rethink their strategy because it simply leads to more political chaos. There again, they may not.

Having negotiated the Dutch and French elections earlier in the year, the irony would be if Germany were to become the primary source of political instability with Angela Merkel’s credibility dented beyond repair. It is bad news for two reasons. First, for the euro zone. Having helped steer the euro zone through an existential crisis, Merkel is perceived to be critical to attempts to keep the region on track. Indeed, in Emmanuel Macron she has a political partner across the Rhine who has the vision and energy to kick start Franco-German co-operation. But like other European countries which have turned in on themselves in a bid to address domestic dissatisfaction, a large swathe of the German electorate voted for the AfD in protest at Merkel’s policy of opening the gates to thousands of immigrants. Even assuming she remains as Chancellor, Merkel cannot blithely dismiss this constituency, suggesting she may be a bit too preoccupied in future with domestic issues to fully focus on the euro zone.

It may also be bad news for the UK as it seeks to push forward with Brexit negotiations, for precisely the same reasons. A German Chancellor who is understandably more worried about domestic developments will be less focused on a problem which is perceived across the EU27 as a self-inflicted wound. Moreover, there still appear to be those on the UK side who believe that getting Germany onside will be sufficient to help them get what they want. This was always a naïve view – after all there are 26 other governments with a vote. But if Merkel is less willing, or able, to push through a Brexit deal it removes a crucial weapon from the British armoury.

A second tremor today was the announcement that the European Medicines Agency and European Banking Authority are set to leave London for Amsterdam and Paris respectively. This is the Realpolitik of Brexit in action. For a quick overview of why the loss of the EMA is a big deal, this Twitter thread is worth a read. Recall that in April, Brexit Secretary David Davis would not accept that the two agencies had to leave London even though it was clear that the EU had already begun the process of finding a new home. And lest we forget, banks have not yet moved people out in great numbers – but move people they will over the next 15 months, despite the smug proclamations of those who think the world will remain the same as before. Indeed, for anyone who believes that Brexit is broadly leaving the UK unscathed, it should be noted that the economy is growing only at a rate of 1.5% per annum compared to a rate around 2% prior to the referendum – and that is despite an economic pickup in continental Europe.

Neither of the tremors we have experienced today bode well for the future of Europe in general and the UK in particular. Sometimes, of course, preliminary tremors never result in the big earthquake – as residents of San Francisco over the last 100 years can testify. But they should be treated as a warning sign that there could be worse to come. In the UK case, you can bet on it.

Fiscal constraints are mainly political

With days to go before the government unveils its Autumn Budget, the newspapers are full of the various wheezes that the Chancellor might adopt in order to keep borrowing down whilst simultaneously addressing the key areas that fiscal policy is expected to tackle. As if the economics were not daunting enough, the Chancellor is unpopular amongst large swathes of his party who view his calls for a soft Brexit as a form of heresy. Indeed, were it not for the fact that the Conservatives were decisively weakened at last June’s election, the generally accepted narrative is that Philip Hammond would have been sacked in the summer – partly for Brexit-related reasons but also because of his bungled handling of the proposed rise in national insurance contributions for the self-employed in March.

Hammond’s task is unenviable. The Conservatives are looking to him to provide a fillip to a government which is struggling to regain momentum, but if he gets it wrong his political stock will fall further. The three key areas which he is expected to address are austerity, the thorny subject of public sector pay and a lack of housebuilding. In effect, the latter two are branches of the first and go to the heart of the government’s strategy over the last seven years. Over this period, total government spending has fallen by more than 5 percentage points of GDP – there has not been a squeeze like it since the early-1990s, and even that reflected the rapid pace of nominal GDP growth.

But there is an increasing sense that public sector services are struggling to cope. Although the NHS has been ring-fenced from the worst of the cuts, outlays are not rising fast enough to cope with the changing composition of the population; concerns are mounting about the lack of funding for the police and fire brigade (something I touched on here) and education remains a major bugbear for all political parties. In addition, the squeeze on public sector pay, which was frozen for two years in 2010 and has been capped at 1% per year since 2013, has demoralised staff morale and evoked sympathy from the British public which is generally supportive of the public sector workers on which it relies. Meanwhile, there have been calls for additional borrowing to fund a public sector housebuilding programme to alleviate shortages, and reforms to a university student funding model which requires them to load up on debt now and pay it back over a period of 30 years.

All of this is taking place against a backdrop of a plan to broadly balance the budget by 2022 (although the Conservatives admitted in their election manifesto that it is unlikely to happen before the mid-2020s); the UK’s poor productivity performance – likely to be revised down by the OBR on Wednesday – which will increase the fiscal headwinds, and Brexit. Not only is Hammond’s task unenviable – it is frankly unachievable under current circumstances. Up to now, he has operated within the constraints set by previous Chancellor George Osborne, whose mantra of deficit reduction at all costs was misguided (as I never tire of pointing out). But now he has the opportunity to redefine the fiscal agenda.

First and foremost, the balanced budget agenda should be ditched for it serves no useful economic purpose. Moreover, the nonsense of talking about fiscal aggregates in monetary terms should be downgraded. The howls of tabloid outrage every time a figure in the millions – or even billions – is discussed should be set against the fact that the value of economic output is in the trillions. Furthermore, if the government is concerned about how the market perceives fiscal credibility, the focus should be on debt and not so much the fiscal balance. In simplistic terms the debt-to-GDP can fall, even in the presence of a small primary deficit, so long as the rate of nominal GDP growth is higher than the interest rate on debt. Admittedly, the government has more work to do here as it struggles to stabilise the debt ratio which, on the standard Maastricht criteria basis, is just shy of 90%. But the rate of increase has slowed and debt stabilisation is possible in the next year or so.

There is certainly no sign that the debt market is concerned about UK public finances which, let us not forget, show the deficit-to-GDP ratio just above 2% compared with almost 10% in fiscal 2009-10. Indeed, the interest rate on the benchmark 10-year gilt is currently at an unprecedented 1.3%. There is thus scope to loosen the purse strings a little. I further maintain that the plan to cut the corporate tax rate from 20% today to 17% by 2020 puts an unnecessary hole in the budget balance which could alleviate the strain on critical public services (it is estimated to cost just over £7bn in lost revenues).

A bit of fiscal largesse might go some way towards lifting the gloomy national mood which is reflected in our polarised society (rich against poor; young against old; Leavers against Remainers). Brexit will also change the calculations. Contrary to what the Leavers told us, any fiscal savings from leaving the EU will likely be more than swamped by the long-term impact on revenues resulting from slower growth. I suspect the Chancellor knows this but given the political constraints imposed by his own party, there is little he can do about it.