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'Boris bounce' to get higher as investment central to his first budget

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Boris Johnson. Photo: Reuters

Boris Johnson. Photo: Reuters

REUTERS

Boris Johnson. Photo: Reuters

Boris Johnson led the UK's Conservative Party to its biggest victory in a national election since the days of Margaret Thatcher by persuading voters in former industrial heartlands to vote Tory for the first time.

Johnson promised to "get Brexit done" after years of political gridlock and duly delivered on January 31, when Britain formally left the EU. But if he is to retain support in some of the poorest parts of the country, he must now address the grievances of those who feel economically marginalised.

As the face of the campaign to leave the EU, Johnson skilfully harnessed anger over almost a decade of cuts to public services and erosion of living standards to build support for Brexit.

Now he has promised to "level up" struggling regions, leaving no doubt Britain is about to open the spending taps. The only question is by how much.

The answer will be contained in the boxy red briefcase finance minister Rishi Sunak will carry into Parliament on March 11, when he presents the administration's first budget.

Britain is headed for the biggest fiscal stimulus since the early 2000s, when the Labour Party was in power. The expectation is that its budget deficit is set to increase significantly from the £44bn (€50bn) or so estimated for the current fiscal year. Investors appear sanguine about the prospect, with yields on government bonds close to record lows.

For now, Johnson is basking in a "Boris bounce". His election win removed the crippling uncertainty over Brexit, buoying confidence among businesses and consumers.

If Johnson gets it right, the budget could buttress the economy at a challenging time, as the spreading coronavirus roils global markets and Britain begins the enormous task of negotiating a trade deal with the EU. If talks fail, the country will once again face a disruptive rupture with its largest trading partner.

Politically, the budget could also help bolster Johnson's power. It is early days, but he has a huge 80-seat majority in the Commons, and Labour is still reeling from its worst election result since 1935.

The Conservatives inherited a budget deficit equal to 10pc of gross domestic product, the highest in British peacetime, when they took office in 2010 in the aftermath of the financial crisis. The shortfall is now just under 2pc. But the squeeze, amounting to more than £100bn of spending cuts and tax increases over the course of a decade, has been brutal. The National Health Service and education were protected, but few other areas escaped.

Johnson's budget is expected to target areas such as the north-east and midlands with billions for infrastructure, on top of money already pledged for public services such as schools, hospitals, and policing.

Johnson inevitably invites comparisons with Donald Trump. Both rode waves of popular discontent and stand outside the fiscally conservative traditions of their own parties. The fiscal boost being prepared in the UK could exceed that in the US in 2018, which the International Monetary Fund estimates at around 1.3pc of GDP.

But there are key differences. The Trump stimulus cut taxes more than it increased spending, and the effect was immediate but short-lived. Officials had hoped businesses would use their tax savings to increase investment, but so far this hasn't been the case.

Johnson's budget, with its emphasis on capital spending, may take longer to feed through. Infrastructure projects take time to come onstream, and some proposals could fall by the wayside.

However, investment ultimately delivers a greater economic impact than tax cuts, not least because wealthier individuals often save rather than spend their tax windfalls.

Growth in Britain is expected to slow this year but rebound in 2021 and 2022, with robust government spending and investment.

Johnson is hoping the momentum extends as far as the next general election in 2024, when voters will decide whether the new prime minister has lived up to his promises.

Bloomberg

Bloomberg