Hammond: ‘Shock’ of financial crisis still with us

Philip HammondImage copyright Reuters

The “shock” of the financial crisis continues to impact the economy and peoples’ finances, UK chancellor Philip Hammond has said.

Ten years after the financial system went into meltdown, he admitted “people are still suffering the effects”.

But he said, in an interview with BBC economics editor Kamal Ahmed, there is “light at the end of the tunnel”.

Rising wages and falling inflation were good news, he said, but uncertainty about Brexit was an economic dampener.

A decade ago this week, the US investment bank Lehman Brothers collapsed, sending shockwaves through the global financial system.

Research carried out for the BBC to mark the occasion showed that wages remain substantially below what they would have been with the crisis.

Mr Hammond told the BBC: “We suffered a very big shock to our economy in 2008/09, and that’s a shock from which people are still suffering the effects today.”

He was “acutely conscious” of the impact on wage stagnation and living. But he added: “We have got through this in much better shape than many of our neighbours.

“We haven’t suffered catastrophic rises of unemployment, on the contrary, we’ve seen employment grow by three million jobs over this period.

“We didn’t see widespread repossessions of homes, collapses of businesses, in the way we’ve done in previous recessions, so I think the way this has been managed has minimised the impact.”

Brexit disruption

Independent analysis from the Office for Budget Responsibility projected real wage growth over the coming years, he added.

Mr Hammond also defended government efforts to cut debt, which many people argue led to austerity and worsened the impact on peoples’ incomes and the economy.

“In the aftermath of the crisis, the urgent need was to reassure markets and investors about our intentions,” Mr Hammond said. “Government borrowing had grown to unprecedented levels – almost 10% of our total national income in the year after the crash – and the markets needed to know that we were going to be able to get that under control.”

He had, in fact, relaxed fiscal rules when becoming chancellor in 2016, Mr Hammond pointed out. That gave “more headroom” he said.

But the challenge the economy faces “is not lack of demand, it’s poor productivity. It we want to see sustainable rises in living standards and real wages, we have to address the productivity challenge,” he said.

An impediment to stronger economic growth was uncertainty about the outcome of negotiations to leave the European Union, the chancellor said.

Debt burden

Brexit talks were currently “acting as a dampener on the economy”.

“The potential of a no-deal exit with high disruption as a consequence is clearly a risk to the financial system.”

He repeated warnings about the impact on London’s huge financial services sector from a non-deal Brexit. “If that market is disrupted then there could be significant consequences.”

Mr Hammond said he understood the calls for more spending on, say, the NHS and police. “We’ve made a huge commitment to the NHS, committing to spending £24bn across the UK by the end of this five-year period,” he told the BBC.

But he added: “We do have to get our debt down. We have to do that for two reasons: Firstly the cost of our debt, is crippling – £50bn a year of money that we could be spending on schools and hospitals and police forces, being paid out in interest on the debt.

“Secondly, having a debt that is this high, 85% of our GDP, reduces our ability to respond to another shock to the economy, another recession.”

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