Sat, Feb 15, 2020 - Page 6 News List

UK political shock opens door to stimulus

‘BIG CHANGES PLANNED’:Experts said that the resignation of Sajid Javid makes it more likely that Conservatives will free themselves of his strict fiscal spending rules

Bloomberg

Less than a month before a UK budget intended to set out British Prime Minister Boris Johnson’s post-Brexit economic vision, the reset button has been hit.

The resignation on Thursday of British chancellor of the exchequer Sajid Javid, who was to present what is traditionally a closely watched piece of political theater, has upended economic policy.

It calls into question the government’s fiscal prudence — a long-standing trait of Johnson’s Conservative Party — and even when the blueprint will be unveiled.

In short, it is a mess. Javid quit because he was asked to fire his most senior advisers.

The position is second only to that of prime minister and enjoys a degree of autonomy. The interference suggests that Javid’s reputation as a fiscal hawk clashed with a desire in 10 Downing Street for looser purse strings.

Now, with Johnson having greater control, an even more generous tax and spending program could be in the works.

In a sign of just how much is up in the air, Johnson’s spokesman could not confirm that the fiscal rules Javid had set would still apply. The March 11 budget might be deferred.

Anticipation that new British Chancellor of the Exchequer Rishi Sunak, previously Javid’s deputy, will be less of a brake on spending ambitions prompted British the pound to rally on Thursday and pushed gilts lower.

“[US President Donald] Trump-style stimulus could return,” Citigroup economist Benjamin Nabarro said. “Javid’s resignation makes it more likely that the Conservatives jettison their 2019 fiscal framework sooner, paving the way for large fiscal easing.”

The budget was already expected to deliver fiscal stimulus, with more money for cash-strapped public services and billions of extra pounds for infrastructure to “level up” struggling regions.

Taken together, the infrastructure boost and an additional £12 billion (US$15.7 billion) for public services announced in September last year could deliver a stimulus of more than 1 percent of GDP over the next year.

New plans could include tax cuts, which would provide a much more immediate boost to the economy than investment projects, Nabarro said.

“Why go through the trouble of reorganizing the workings of the Treasury and essentially push an unacceptable arrangement on the chancellor, if there are no big changes planned, both in substance and in size,” RBS economists Cathal Kennedy and Peter Schaffrik wrote.

Javid’s fiscal rules allow extra infrastructure spending, but also require day-to-day public spending and revenue to be in balance within three years.

That goal is much tighter than had been expected, and Javid had also asked ministers to find savings ahead of a spending review later this year.

The UK’s National Institute of Economic and Social Research estimated a £10 billion gap and said that the framework might have to be revisited.

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