In the present unusual circumstances this change, despite his coming from the same political party as the outgoing Prime Minister, could prove a watershed in British politics and economic policy. This note examines how policy might be different.
The new PM will have to cope with three tough issues. First, the economy is running out of steam, partly because of the inventory cycle which Cebr first identified. The Office for Budget Responsibility has forecast that a ‘no deal’ Brexit could plunge the economy into recession in 2020. Unusually for a government body warning about Brexit, this forecast might not be too far off the mark. Second, Brexit has to be managed. The chances of a disruptive Brexit are high, though it still looks likely that a deal of some kind can be achieved. Third, if he wants to achieve anything he will need to get a more supportive Parliament and so an early election, with all the risks that it might yield unexpected results, will be hard to avoid.
On the other hand, public borrowing is down to 2% of GDP though the ratio of public debt to GDP is still edging up at 86%. There is probably some scope in reality for a fiscal boost even if economic purists would warn against it.
The new Prime Minister-in-waiting has promised tax cuts for rich and poor (‘the poor must take precedence’), a reform and reduction of stamp duty and a range of other eye-catching policies such as huge manufacturing zones in free ports as recommended by Cebr. He has also indicated a willingness to borrow more for ‘great infrastructure projects’. Furthermore, he has shown considerable scepticism about official advice (unusually for a politician he has never been a special adviser) and indicated that he plans to open up policy making. He has suggested an early Budget in September.
Most of us who have been around in public life in the past quarter century have met Boris and think we know his instincts. But he is very much his own man and can do the unexpected. This is a series of informed guesses about what he might do:
1) Income tax cuts seem inevitable. The full promised rise in the upper rate threshold to £80,000 would cost too much in the short term and will have to be phased in. And as pointed out in the Andrew Neil interview, he will have to match the cuts with similar measures for the less well-off. It looks likely that £5-10 billion will be invested in these cuts over the next two years with more to come later. Britain could again become a low tax environment since Boris understands the impact of ta xes better than most in public life.
2) The early boost to the economy is likely to come most from the proposed cuts in Stamp Duty. Because the current high rates are depressing yields and the market, it is quite likely that these cuts will both revitalise the housing market and have little net cost.
3) Some eye catching projects like CrossRail 2, a heavy Northern Powerhouse investment programme and possibly a nationwide cycling policy could be announced combined with a ‘value for money’ review of HS2.
4) A review of the Treasury and its role is possible. Boris has no reason to love the civil service and will want to put some pressure on it. There will be a new Governor of the Bank of England, who may well not be one of the usual ex-officials. Other independent experts are likely to be called in.
This might just be enough to get the economy going, especially when combined with a dose of Boris optimism. It will certainly mark a change.