LONDON (Reuters Breakingviews) - Britain looks like it will finally get the right fiscal policy, though for the wrong reasons. As they battle to become prime minister, Conservative party rivals Boris Johnson and Jeremy Hunt are both promising a post-Brexit splurge. Lower taxes and higher government spending would mark an overdue retreat from austerity, and relieve the Bank of England of some of the burden of propping up the economy.
Johnson, the favourite to succeed Theresa May, said on Sunday he would spend more on education, adding to earlier pledges to invest in transport and superfast broadband, increase policing and cut taxes. One of Hunt’s flagship commitments is to slash the corporate tax rate from 19% to 12.5%. There’s a hefty price tag. While some of the plans are too vague to be costed, the independent Institute for Fiscal Studies estimates Johnson’s plans will cost upwards of 25 billion pounds a year; Hunt’s add up to at least 40 billion pounds annually.
That’s a big shift from the government’s previously restrained fiscal policy. Finance Minister Philip Hammond in March said there was room to borrow nearly 27 billion pounds more in the 2020-21 financial year without busting the government’s self-imposed rules. The IFS reckons the figure is closer to 15 billion pounds because of accounting changes. The wiggle room will vanish if a disorderly Brexit reduces growth further. More importantly, this headroom is a one-off; tax cuts and recurring spending would have to be financed each year.
It’s high time to abandon rigid fiscal rules, though. The UK manufacturing sector shrank at its fastest pace in more than six years in June, a survey of purchasing managers showed on Monday. Stimulus is required to counter a slowdown which has been exacerbated by Brexit uncertainty. And the government could repair some of the damage to growth by investing wisely in infrastructure and education.
Not all the ideas are wise. Johnson’s tax cuts would disproportionately help the richest, and there’s little logic for cutting already-low corporate tax rates. Plans to issue more debt will worry UK bond investors. The spread between 10-year UK government bond yields and their German counterparts has widened to 114 basis points from 106 basis points at the start of June.
No government policy can undo the economic damage caused by leaving the European Union. But Britain’s next prime minister will enter office committed to a looser fiscal policy. In the circumstances, that’s no bad thing.
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