Business

Chancellor Philip Hammond has good reasons to stick to his guns

The government is now raking in more money than it spends on "day-to-day" activities, posting a current budget surplus for the first time since 2002.

Yesterday's figures, which apply to the 2017-18 fiscal year, are undoubtedly good news and credit must go to chancellor Philip Hammond for his steadfast approach to improving the UK's public finances.

However, there are several reasons why he should continue to resist calls for a spending splurge despite the positive numbers.

Firstly, the government is still running a considerable deficit (over £40bn a year) when we include spending categorised as investment. While much capital expenditure can be endorsed as growth-positive, such a deficit cannot be ignored when the debt pile is edging towards £1.8 trillion, equivalent to more than 86 per cent of GDP.

Secondly, the size of the debt pile looks ominous given threats to the outlook. In the short run, economists expect the public finances to be squeezed later this year, and other dangers linger on the horizon.

Read more: IFS: Brexit job losses for UK would have "severe" consequences for Budget

There is Brexit, of course. While a mutually beneficial agreement between the UK and EU is eminently possible, one cannot assume politicians (on either side of the Channel) will deliver a swift and sensible resolution.

Beyond Brexit, some economists have warned that western economies could fail to return to levels of growth enjoyed in recent decades. And if modern history is anything to go by, we are due another recession before long.

Furthermore, demographic pressures on the public purse are set to intensify. On top of soaring health and social care costs, governments will increasingly need to address the fact that a large proportion of the population are failing to build up sufficiently-sized pension pots. Proposals this morning by the think tank Demos to boost the pensions of Britain's near-5m self-employed workers would cost an extra £3bn a year according to Hargreaves Lansdown.

Read more: Hammond hits budget surplus for the first time in 16 years

And that's not to mention a gaping black hole in the student loan programme, with graduates unable to pay back their considerable loans leaving the government to foot the remainder of the bill.

Hammond's predecessor at 11 Downing Street promised to "fix the roof while the sun is shining", a pledge that is finally being met. Political pressures to hike spending may be strong now, but they'll be an awful lot stronger the next time we suffer a truly rainy day.

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CityAM

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