Sunday, July 21, 2019
Counting the cost of a Johnson government
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

When a new prime minister is about to take over, there is normally a sense of excitement, even optimism. In the case of Boris Johnson, however, assuming the polls are right and he is duly elected by Tory party members this week, there is also a powerful sense of trepidation.

New prime ministers normally take office as a result of a general election. On the road to victory, their policies, as set out and costed in manifestos, will have been subject to the closest scrutiny, from the opposition and from the media. Before even making it into the manifesto, they will have been subject to a long, behind-the-scenes process of scrutiny, to make sure that they are credible.

Where this does not occur, it often goes wrong. Nobody was more pivotal to the New Labour government of Tony Blair than Gordon Brown. But when he took over as prime minister without an election in 2007, the policy cupboard was bare even before the financial crisis hit, and his premiership did not work out well.

Theresa May, who also succeeded to No.10 without an election, had ideas, but most of them turned out to be unworkable and were quietly dropped after the 2017 election. Her legacy speech, delivered last week, suffered from a distinct lack of material.

Johnson is in a much weaker position than either of them. Both had been at the heart of government over several years, 10 in the case of Brown as chancellor, six for May as home secretary. Johnson, in two undistinguished years as foreign secretary, was a peripheral figure. The wheels of government did not depend on his presence.

Though he has been dreaming of the top job all his life, he is probably the least prepared for it of any recent prime minister, as he has sometimes shown over the past two or three weeks. Instead of carefully-tested and costed policy proposals, ideas have been tossed out, almost daily, to get through the next hustings or interview.

There is a positive element to this. It could suggest that once he is safely ensconced in 10 Downing Street, again assuming not late and successful burst from Jeremy Hunt, many of the most expensive ideas will be either quietly forgotten or put in the filing cabinet marked “long-term ambitions”.

Philip Hammond, who has been enjoying his last few days as chancellor by settling out markers against a no-deal Brexit, is fully expecting to return to the backbenches for the first time in two decades. His successor, and the assumption in Westminster is that it will be Sajid Javid, the current home secretary, will not want to preside over a borrowing binge which, alongside the sterling crash that would result from the wrong kind of Brexit, would mean that the new chancellor’s immediate task would be one of crisis management. Poisoned chalices do not become much more toxic than that.

Fortunately, there is an easy way out of this. It used to be said of currency forecasters never to combine a forecast with a date, because that way you would be right in the end. The same goes for tax and spending promises.

No timeline has been attached to the tax and spending promises that Hammond, with a nervous eye on the public finances, has been getting very jumpy about. The two most eye-catching Johnson promises – increasing the higher rate threshold (the point at which people start paying the 40% tax rate) from £50,000 to £80,000, and raising the National Insurance threshold to £12,500 - do not come with a timeline attached.

That means these pledges, assuming g they are not quietly forgotten, could legitimately be stretch out over many years. The hit of roughly £20bn a year to the public finances from these two policies might still eventually occur but it would take several years. The coalition’s government’s pledge to raise the personal allowance to £10,000, made in 2010, was not delivered until the 2015-16 fiscal year. There is no guarantee that a Johnson premiership will last. It might be fleeting.

One thing Johnson has put a firm timeline on, of course, is leaving the EU, which he has said must and will be on October 31. If he sticks to that, given that there is no time to renegotiate the EU withdrawal agreement before then, and the EU has said that its agreement with the UK (but not the British Parliament) would stand even if there was more time, a no-deal Brexit would appear to be where we are heading.

Currency markets cannot quite make up their minds whether this is even a possibility. Sterling’s fall was broken last week on the view that both a no-deal Brexit and a general election have become less likely. The former was based on the view that, following the vote to insist that Parliament has to meet in October on Northern Ireland, proroguing it to push through a no-deal Brexit will be more difficult. That, in turn, could mean that Tory no-deal opponents do not need to bring down the government, and force an election, to prevent a no-deal exit.

That leaves the question of how the new prime minister will get down from his Brexit pledge. The Office for Budget Responsibility (OBR) provided a timely warning last week that, if he has concern for the economy, a no-deal Brexit is something to avoid.

The OBR’s exercise, predictably, has brought an outbreak of the usual “Project Fear” nonsense. But the fiscal watchdog, which is required to assess the fiscal risks facing Britain, would have been failing into its duty had it not assessed the impact of a no-deal Brexit, alongside other risks.

The way it did it was to take the milder version of the International Monetary Fund (IMF) no-deal, no-transition scenario, published in April, and apply it to the public finances. The OBR did not itself predict the recession outlined in that scenario (with gross domestic product down 2% by the end of 2020 and 4% below the existing official economic forecast) but used it as a basis. It could have used more negative scenarios. There are no credible positive no-deal scenarios, either for the short or long-term.

The OBR’s no-deal stress test pushes up government borrowing by around £30bn a year and public sector net debt – the national debt – up by a huge £272bn by 2023-4. That is the product both of higher borrowing and the assumption that, in the event of no deal, the Bank of England would be obliged to roll over the term funding scheme for the banks. £272bn is a big additional bill for future generations as the cost of a no-deal Brexit; the potential cost of a Johnson government.

Surely action would be taken to mitigate the effects of a no-deal Brexit? Yes and the OBR assumes such action would be forthcoming from the Bank. Were there to be an emergency budget with tax and spending measures, they would add to the additional debt, not reduce it. Tax cuts that pay for themselves, in the spirit of the Laffer curve, are few and far between.

Nor would there be much help from withholding the £39bn divorce bill, even leaving aside the implications for Britain’s international reputation from doing so. Staying in the EU for an extra seven months has already brought the size of the bill down to around £33bn, according to OBR officials. That is equivalent to one year’s extra no-deal borrowing for Britain. It is about 0.2% of EU annual GDP, hardly enough to break its bank.