The new PM is betting that he can pump up enough confidence—and money—to see him through a difficult autumnby George Magnus / August 5, 2019 / Leave a comment
The political tittle-tattle is that Downing Street is in the early stages of a strategy known as “boosterism.” After the despondency and caution of Theresa May’s government, Boris Johnson wants a government of a sunnier disposition. The strategy is part-rhetorical and part-economic but essentially it is about promoting confidence in Britain.
The carefully-crafted policy announcements over the last week or so are just the beginning. We can expect much more leading up to a busy October, a month which will feature an early Budget, the Brexit deadline, and, denials notwithstanding, a possible general election announcement. The strategy is designed to mitigate the adverse consequences of Brexit and ensure victory in any election. What exactly is it, and will it work?
If you think boosterism is a No 10 strategist’s best laid plan for an “ism” alternative to socialism, you are mistaken. It was originally a strategy used by pioneers as they migrated westwards across the United States, promoting policies and programmes to attract capital and labour to local towns and cities. Sometimes it worked, often it was simply a false prospectus that ended up in disappointment and failure.
In the context of Brexit, then, boosterism seems a wholly appropriate term. It is about the promotion of Brexit Britain as the Johnson government seeks to change the narrative. That involves authorising a significant dose of Keynesian tax and spending policies taken straight out of the Labour playbook. For the Conservatives, austerity and cutbacks are gone, and the fiscal wallet is now wide open.
To date, leaving aside the government’s allocation of over £6bn to prepare the country for a no-deal Brexit, the proposals include the recruitment of 20,000 more police officers, a cross-Pennine rail link between Manchester and Leeds, the reversal of cuts to government infrastructure programmes with up to £100bn of additional funding, a £50bn housing scheme and a review of stamp duty. Add to that more money for the NHS, social care, schools, universal rapid broadband, cuts in the upper rate of income tax and in company taxation, and a higher threshold for national insurance.
The government is abandoning its predecessor’s fiscal rules. These were to keep public borrowing to less than 2 per cent of national income by 2020/21, balance the budget in the mid-2020s, and secure a steady fall in net debt as a share of GDP.
Since the start of May, moreover, UK monetary conditions have eased significantly, with the pound falling by 6 per cent on a trade-weighted basis, and slightly more against the euro and the US dollar. This slump may not be over if the government’s threat to leave the EU without a deal is carried out. Furthermore, interest rate markets are now priced for a 55 per cent chance of reduction in the Bank of England’s policy rate of 0.75 per cent, before the end of 2019.
Boris, boosterism and going for broke
The principal focus though will be on the government’s fiscal plans. True, on a 12-month rolling basis, public sector net borrowing is now at about £25bn, less than one-sixth of what it was in 2009 and a little over 1 per cent of GDP. So there is room for flexibility. No one would blink much if the deficit rose to, say, 3 per cent of GDP for a year or two, which would involve an additional £30-40bn of fiscal easing.
Yet Brexit makes these simple boosterism calculations rather tenuous. The Office for Budget Responsibility, the government’s independent fiscal watchdog, released a no-deal Brexit, borrowing stress test recently which painted a grim outlook relative to its March 2019 view. Though relatively benign as no-deal forecasts go, it anticipated a recession, with rising unemployment and falling house prices, with public borrowing rising by £30bn a year over the next four years as a consequence. A similarly worrying outlook was presented in the last government’s EU exit report in November 2018, which set out four modelled outcomes, under the worst of which additional borrowing in the mid-2030s would be around £95bn, the equivalent of 2.5 per cent of GDP then, or 4.6 per cent today.
It is, of course, churlish to object to the government spending money today on worthwhile infrastructure that will spur demand in the short-term, possibly productivity growth in time, and alleviate hardship for people. Yet its plans will have to hold up to close scrutiny, bearing in mind the adverse supply-side consequences a no-deal Brexit is liable to have on the economy and the fiscal position. These will reduce potential growth, making the economy smaller than it otherwise would be, and exacerbate the deterioration in the fiscal outlook. That would also pose further risks to Sterling.
The acid test for fiscal rocket-boosters is not what they will do to demand in the short term but to the economy’s supply side in the medium-term, to offset the Brexit effect, and to overall fiscal competence. Here, at best, the jury is out.
Politically though, the Johnson government’s strategy is a huge headache for the already beleaguered Labour Party, and a problem for Nigel Farage’s Brexit Party too. In short order, Johnson has lined up a cabinet singing from the same hymn sheet, articulated a rather clear economic and Brexit strategy, and presented the government in a favourable light against enfeebled opposition. The Brecon by-election knocked the PM back but that loss was already priced in.
By going for broke on a no-deal Brexit, Johnson is going to fire up his opponents in the EU and in parliament, either or both of which may frustrate his Brexit deadline. That suits him. Through Boosterism he can champion his cause with the electorate, neutralise the Brexit Party, and gamble on a working parliamentary majority in a general election.
It is still a high risk gamble, but almost the easy part, compared to managing the economy through the Brexit that follows.