Philip Hammond: “Cutting London off would be a tremendous act of self-harm from the EU”

Posted On: 
25th January 2018

Philip Hammond fears the free market ideas championed by Britain for decades are under threat, as a younger generation looks to Jeremy Corbyn. But as new technologies transform the economy, the Chancellor believes the Conservative party has a historic opportunity to revitalise capitalism. He talks to Alan Mak. 

The Chancellor says the UK is "not going to play political games with the economy"
Credit: 
Louise Haywood-Schiefer

Staring down from the walls of Philip Hammond’s office at 11 Downing Street are two titans of Victorian politics. Both Chancellors who became Prime Ministers, Conservative-turned-Liberal William Gladstone and lifelong Tory Benjamin Disraeli were bitter enemies, pitted on opposite sides of the debate over free market liberalism as the Industrial Revolution took off.

Today, the debate is not over the Corn Laws but over the very future of modern capitalism itself, as world leaders gather in Davos to discuss the future of an economic model rocked by the rise of populism and fears of a global trade war.  

I sat down with the Chancellor before he left for the World Economic Forum’s annual meeting, where Shadow Chancellor John McDonnell delivered a “warning to the global elite”. Unsurprisingly, Hammond rejects McDonnell’s analysis of the problems facing capitalism, describing Labour’s economic policy as “completely and utterly irresponsible”.

“John McDonnell’s prescriptions for our society would be ruinous, as even they have acknowledged – preparing for a run on the pound, and Angela Rayner’s unrepeatable but unforgettable characterisation of Labour’s approach to economic policy,” Hammond explains. “That’s just not the way you can run the economy of the world’s fifth biggest economic power.”

The Chancellor himself will deliver a rather more upbeat assessment of Britain’s prospects at Davos, championing the same free-market ideals put forward by Gladstone 150 years ago.

But he will also be working to reassure the international community that post-Brexit Britain will remain “an open, free trading, globally focussed economy”. “The UK is one of the few countries in the world that hasn’t turned its back on the concept of free trade,” he says. “Of course we face challenges, no one would deny that. But they are challenges we can rise to and we’ve got many, many comparative advantages. We really want to be looking beyond this period to what Britain post-Brexit looks like, sending a message to the financial services community – which of course heavily dominates the attendance at Davos – that London will remain a global financial services centre.”

The City’s future has taken centre stage in the Brexit debate in recent days, after French president Emmanuel Macron appeared to rule out the idea of a tailored deal for the financial services sector – unless the UK pays into the EU budget and accepts the bloc’s rules. On his visit to London last week, Macron was asked why he was opposed to including the City in any post-Brexit trade deal. His reply was blunt. “If you want access to the single market – including the financial services – be my guest,” he said in a press conference. “But it means that you need to contribute to the budget and acknowledge European jurisdiction.”

Asked about Macron’s comments, the Chancellor is equally clear: “Trying to cut London off from the EU marketplace would be a tremendous act of self-harm by the European Union,” Hammond warns. 

“It won’t have the effect of moving London’s business to a new global centre somewhere in Europe. It will have the effect, if anything, of strengthening New York, Singapore and other centres outside Europe.

“I think steps that we took before Christmas announcing we would continue to allow European banks to branch into the UK shows we are not afraid to engage with the challenges of Brexit.

“We are not going to play political games with the economy.”

Hammond and I meet on the same day that CBI Director-General Carolyn Fairbairn delivers a speech calling for the UK to remain part of the EU Customs Union. “There may come a day when the opportunity to fully set independent trade policies outweighs the value of a customs union with the EU. A day when investing time in fast-growing economies elsewhere eclipses the value of frictionless trade in Europe. But that day hasn’t yet arrived,” Fairbairn warned.

It’s an assessment swiftly dismissed by the Chancellor, who insists that the UK will be leaving both the Single Market and the EU Customs Union, and is instead looking for a deal that would secure the “highest level of access” to the EU’s markets.

“I think that is good for both our economy and the European Union because we do have very complex and deep supply chains and business relationships stretching across the continent of Europe,” he says. “It’s perfectly possible to maintain those deep trading links with Europe after we leave the European Union and then gradually build our trading links with the world on top of that.”

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But while Brexit will be at the forefront of the agenda in Davos, domestically the fallout from the collapse of Carillion continues to fan the flames of Labour’s attacks on corporate greed and demands for a return to nationalised industries.

For the Chancellor, it was the right decision to let Carillion go into liquidation. As a customer of the company, he says it would have been wrong for the government to bail them out.

“The essence of a market economy is that companies that are badly managed – or that take wrong decisions – must be allowed to fail,” he continues.

“The services being delivered by Carillion will still be needed, the people delivering them will still be needed, but the company itself has failed, because of the decisions it took – and its shareholders have to bear the burden of that.”

The collapse of Carillion will be felt especially hard by its subcontractors. Some estimate that as many as 25,000 businesses are owed money by the firm.

According to Hammond, part of the problem is that government departments are “not very well equipped” to deal with numerous smaller contractors. The default position is often to award a single large contract and let the main contractor then sub-contract the work.

“I think we have got to look at a model in the future where we beef up central government’s ability to manage contracts so that we can operate a tier down with perhaps a number of regional contracts rather than one national contract,” he adds.

As the government defends itself from attacks on Carillion, the NHS and Brexit, prominent backbenchers Ed Vaizey and Nick Boles have criticised the May administration for a lack of ambition and ideas. In a tweet last week, Boles said there was a “timidity and lack of ambition” about the government, adding: “Time to raise your game, Prime Minister.”

“I just don’t agree with their analysis. We are ambitious,” Hammond says of the pair’s comments. “We have begun to set out and implement very ambitious agendas in technical training, in opening-up new channels of capital provision, we have committed large amounts of additional capital spending to infrastructure investment, and we set out a highly ambitious industrial strategy, as well as dealing with the huge challenge of delivering a Brexit that works for Britain.”

Hammond knows that the key to winning back the goodwill of disgruntled backbenchers will be addressing the Tories’ electoral weaknesses, especially in attracting younger voters.

In this month’s reshuffle Sajid Javid was given a beefed-up role as Secretary of State for Housing, Communities and Local Government. But more important, Hammond points out, was the announcement in his Autumn Budget that the Homes and Communities Agency will become Homes England. This new body will drive implementation of the government’s housing white paper, with new land buying powers, as part of a plan to build an average of 300,000 homes a year by the mid-2020s.

“It has good statutory powers, it’s got money, and it’s got good planning powers. It will be a very powerful instrument,” Hammond continues.

“We have told the guys running it, get out there, and make things happen. Don’t prat around. Look at sites which are stuck. Deal with the problem. I think what we have done is very ambitious.”

The Chancellor is also under growing pressure from Conservative backbenchers over defence spending. Plymouth Moor View MP Johnny Mercer recently warned defence cuts could “sink a government”, while former defence minister Sir Mike Penning warned in an interview that the army had been cut “down to the bone”.

Hammond, who spent three years as Defence Secretary under the coalition government, is well aware of the arguments, and says he has “a deep commitment to the armed forces and to the defence of this country”.

In particular, he hits out at newspaper reports just before Christmas that claim he favoured reducing the army to 50,000 troops. The report was “bogus”, he says. “I’ve never argued that the Army should be reduced to a smaller size.”

Hammond remains committed to the Nato floor of spending two per cent of GDP on defence, but he also points out that more members of the alliance need to step up to meet their financial commitments.

“Neither the British nor the American taxpayer can or should carry the burden of defending Europe," he says. “European taxpayers have to contribute more and some of our affluent neighbours are still delivering defence budgets that are very far short of the two per cent Nato target. So that has got to be our priority." 

Throughout the interview, the Chancellor sets out a positive case for the future of the UK economy, rattling through government policies on infrastructure investment, housing and future global trading relationships. But most importantly, he was keen to press home work being done to prepare the economy for the changes that new technologies heralded by the Fourth Industrial Revolution will bring.

Advances in artificial intelligence and robotics have the ability to boost our productivity, which lags behind our G7 rivals, and Hammond argues that Britain must “embrace this technology”. That includes a new national retraining programme to ensure that our workforce is ready and agile enough to deal with the challenge of automation. 

And, ultimately, he sees new technologies and higher productivity as the route to revitalising the free-market, defending it from attacks by Jeremy Corbyn and the Labour party.

“We can’t afford to turn our backs on the future, we have to embrace the future, but we have to do it in a way that ensures that everybody can benefit from new technology and the way that our economy will change,” he says.

“While I don’t for one second agree with Jeremy Corbyn and John McDonnell about policy, I do agree that the nature of capitalism will change as some of the technologies that are being not only being developed but deployed, are bringing consumers and suppliers closer together, taking intermediaries out of loops like financing, and posing challenges to some of the traditional structures in our economy.

“They will change the way that the economy works and they will change the way that economic model operates. I think that can be – if we get it right – a positive thing for citizens, who are for the most part both consumers and producers.”

With the reshuffle over and phase two of Brexit talks starting imminently, the Chancellor concludes by setting out what he would like to have achieved by the end of this crucial year. “Delivering on our commitment to Brexit and making sure it’s done in a way that supports British jobs, prosperity and businesses” will be the priority, he says. “To show a generation that is perhaps questioning it, how a liberal market economy adapting and adopting new technology, willing to change the way it works, can change its model to reflect the power that new technology can deliver for the next generation.”

A bold answer from an optimistic Chancellor who, just like previous occupants of Number 11 whose portraits hangs on his wall, is a passionate defender of the free market.