(Bloomberg Opinion) -- If Britain’s December election saw the Tories park their tanks on Labour’s traditional turf, the government’s first budget set out a vision for how that territory will be transformed with Tory roads, homes, schools and public services.
It’s a project so interventionist it would have filled previous Conservative administrations with horror. But not only does it reflect the political mood of Brexit Britain, it is firmly grounded in the realization that successive Conservative governments have under-invested for too long (creating some of the conditions that helped produce the Brexit vote).
The headline announcements in Britain’s first post-Brexit budget were bound to be related to containing the economic fallout from the coronavirus. Chancellor of the Exchequer Rishi Sunak announced a 30 billion-pound ($38.5 billion) stimulus package, including 12 billion pounds of new money, to help protect businesses and individuals. Whether that proves sufficient depends on how bad the outbreak becomes, the preparedness of the National Health Service and the wisdom of the government’s approach so far of avoiding the more draconian measures taken by Italy, Israel and China.
As I wrote Monday, a large-scale disruption that threatens whole industries will mean a much bigger bill.
And yet, let’s assume for a minute that Sunak’s provisions are adequate. At 39, he isn’t quite Britain’s youngest chancellor (George Osborne got the job at 38), but he may be the luckiest in terms of the financial war-chest he inherited and in the low-interest rate environment. Thanks in part to those years of austerity, he can invite the country to an all-you-can-eat buffet.
Britain’s Labour Party lawmakers could only stare on blankly as Sunak delivered the most expansionist budget Britain has seen in a long time. Here was a Conservative chancellor promising to spend “whatever it takes” on the NHS, and stealing Labour’s clothes by branding his side the “party of public services.” Here, too, was a Tory writing checks left and right: for new roads, schools and hospitals; for whisky drinkers and wine swillers; for gig-economy workers and doctors; for the homeless and those getting by on benefits. And here was the traditional party of City bankers and the wealthier southern counties bending over backward to support the forgotten parts of the country that used to be Labour heartlands.
Public investment has lagged across the U.K., averaging only 1.4% of national income over the past four decades. Over the next five years it will be 2.9%, more in line with what the Organization for Economic Cooperation and Development recommends, though hardly breaking the mold. This is surely right, with research showing that increased public investment can help deliver not just immediate stimulus as builders get to work, but sustainable increases in growth.
Day-to-day spending on public services will increase by 2.8% per year in real terms over the next three years, but that’s still around or below the growth of public services spending during the early noughties (it reached 4.8% in 2004 under Labour’s Tony Blair).
Of course, if it were as simple as spending your way to growth, governing would be easy. Much depends on the quality of the spending and how it’s funded. While Sunak said his new measures would adhere to the fiscal rules set out by his predecessor Sajid Javid, I’d expect Javid’s rules to be diluted. Current revenue and growth projections don’t take into account the virus.
And the government will probably want to announce more spending later, possibly in the autumn budget. This one didn’t tackle the problem of social care. Addressing woefully underfunded services for the elderly and the chronically ill was a manifesto commitment and will require substantial investment. Wednesday’s budget did very little to work toward the U.K.’s 2050 net-zero emissions target and doesn’t tackle the country’s lack of skills training.
Looser rules may be an acceptable price to pay, particularly in this time of ultra-low interest rates. But it all depends on what Britons get for all that spending.
That isn’t clear yet. It’s one thing to pledge a massive increase in resources for infrastructure projects (Sunak allocated more than 600 billion pounds over the five-year parliamentary session), but quite another to find viable, shovel-ready projects to fund. As former business secretary Vince Cable wrote for Bloomberg Opinion, mega-projects often run wildly over budget and over time.
Sunak also announced 800 million pounds for the creation of a blue-skies agency for “high-risk, high pay-off research,” modeled on the U.S. Defence Advanced Research Projects Agency (Darpa), a goal of Johnson’s adviser Dominic Cummings. It may be a worthy ambition, but a new article in Nature magazine explains why the U.S. agency will be hard to replicate; it requires massive resources and a commitment to painstaking diligence, while the U.K. seems in a hurry for results.
The Office for Budget Responsibility has revised down its U.K. growth forecasts, predicting the economy will expand by 1.1% this year instead of 1.4%, before taking into account any hit from the virus. The minimal movement in yields on 10-year government bonds suggests markets are unconcerned about higher borrowing under current conditions. So Sunak will probably have room for a while. He will need it, especially as the costs of Britain’s European Union exit are felt.
If his budget is successful — in mitigating the impact of the coronavirus, driving up growth rates, stimulating productivity and “levelling up” the economy — then it’s hard to see what would drive the Tories from power short of a major scandal. More than that, it would provide a blueprint for populist parties everywhere.
For now, it looks like a budget that contains big promises, feels exciting and demands a major leap of faith. Indeed, it’s much like Brexit and Johnson’s entire political career.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Therese Raphael writes editorials on European politics and economics for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.
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