LONDON (Reuters Breakingviews) - Britain’s Conservative government has a new fiscal strategy: promise jam every day. Rishi Sunak, the country’s new finance minister, on Wednesday announced 30 billion pounds of new spending in the coming year, with almost a quarter of that dedicated to helping the public and the economy cope with the coronavirus. The robust response to the health crisis – a few hours after the Bank of England slashed interest rates – is welcome. But it leaves Prime Minister Boris Johnson little wiggle room.
Sunak’s extra spending for the 2020-21 fiscal year is worth roughly 1.4% of Britain’s gross domestic product. And that’s just the start. His decisions imply 36 billion pounds of loosening in the following year, and even more after that. The independent Office for Budget Responsibility called it the largest fiscal loosening since a previous Conservative government’s pre-election budget in 1992.
The coronavirus outbreak gives Sunak the necessary cover. Few will quibble with spending 1 billion pounds to boost the welfare system and provide a hardship fund for local authorities. Assistance for small businesses with cash flow problems is sensible; so is up to 5 billion pounds for the health service. And even before the Covid-19 outbreak, there was cross-party agreement that Britain needs more capital spending. Cue public investment of more than 600 billion pounds over the next five years.
Yet there were fewer measures to finance the handouts. True, this is not the moment to slap new taxes on households or businesses. But Sunak dropped a heavy hint that he may ditch fiscal rules, announced by his predecessor just last year, which require day-to-day spending to be fully covered by tax revenues within three years. That’s not surprising. The United Kingdom has had 16 fiscal targets in the past decade and often missed them, according to the Institute for Fiscal Studies. What’s more worrying is that Sunak may have passed up an opportunity to introduce less popular measures.
UK governments tend to raise taxes after elections in the hope that memories of bad news fade before the next vote. Record low borrowing rates make it a good time to rethink fiscal rules. But bond investors may not be so generous when their virus fears recede.
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