Dueling Chancellors Send U.K. Spending Pledges Through the Roof

(Bloomberg) --

Boris Johnson and Jeremy Corbyn escalated their spending pledges, drawing election battle lines with plans to end a decade of U.K. austerity.

Chancellor of the Exchequer Sajid Javid said Thursday he’ll jettison the existing fiscal rules, allowing the Conservative government to devote an extra 20 billion pounds ($26 billion) a year to capital projects such as railways and roads if Johnson’s party is re-elected.

That commitment was immediately dwarfed by Shadow Chancellor John McDonnell, who promised an additional 55 billion pounds a year in the first term of a Labour government -- more than double the current plan in Corbyn’s party.

The pledges, made in separate campaign speeches in northern England, fueled concern of an arms race of giveaways as leaders make good on vows to end the fiscal restraint that has alienated voters in poorer regions.

For investors, the dueling U.K. spending plans were overshadowed by signs of a thaw in U.S.-China trade relations and a warning from Bank of England Governor Mark Carney that risks to the economy are mounting. Gilts, or U.K. government bonds, declined and the pound weakened.

The Resolution Foundation, a U.K. research institute, says Britain is heading for 1970s levels of government spending, whoever wins the election, with Labour looking more profligate than the Tories.

“The economic plans set out by Labour and the Conservative parties today represent a dramatic shift from the narrow debt-driven debate that has dominated the past decade,” said James Smith, research director at the London-based group.

Alarm Bells

Some in the markets have also begun to sound the alarm. Henderson Rowe’s head of research, Artur Baluszynski, said last week he would worry about a crisis of confidence from foreign investors if a wave of additional spending was unleashed, particularly under a Labour government. Bank of America Merrill Lynch sees the market as “vulnerable.”

Javid sought Thursday to cast the election as a choice between responsible investment under the Conservatives and the “fantasy economics” of the opposition.

The chancellor ditched the Tory commitment to eliminating the overall budget deficit. His new rules seek to balance the day-to-day budget in three years and limit net investment to 3% of gross domestic product. Debt, he promised, would be lower at the end of the next parliament than it was at the start.

The announcement ended months of speculation over what would replace the current fiscal rules, which require structural borrowing to be kept below 2% of GDP in 2020-21. Javid will almost certainly breach that ceiling after announcing an extra 13.4 billion pounds of spending on public services in September.

The chancellor said low interest rates mean it is now a responsible time to increase investment from the long-term average of less than 2% as he held out the prospect of a “decade of renewal.” Investment plans would be reassessed, however, if debt-servicing costs rose significantly.

Labour also committed to keeping the current budget in balance. Under its plan, new investment would rise to around 100 billion pounds a year, from 47 billion pounds in 2018-19. That would take Britain from near the bottom of the international investment league to close to the top, though both parties may struggle to deliver on their plans.

“History suggests ramping up even to levels Conservatives might target would be tough,” said Paul Johnson, director of the Institute for Fiscal Studies. “Spending what Labour propose, and ensuring it is spent effectively, would be extraordinarily hard.”

Rather than seeking to reduce debt as a share of GDP, Labour is instead aiming to increase public-sector net worth, which recognizes the value of public assets, not just the debt required to create them.

While Labour would build on the Conservatives’ plans for non-investment spending, they’d pay for this with tax increases. The Tories, meanwhile, have said they’d deliver around 20 billion pounds of cuts to payroll taxes.

--With assistance from Charlotte Ryan.

To contact the reporter on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Paul Sillitoe

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