Yahoo Finance Boris Johnson and his Tory rivals could take UK on a borrowing spree
The UK government is likely to go on a borrowing spree under the next Conservative prime minister, according to analysts.
Most of the candidates in the Tory leadership race have already unveiled plans for significant tax cuts, and face pressure to ease the drastic spending cuts of the past decade.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the new prime minister would most likely “quietly shelve the current fiscal targets.”
Boris Johnson or another new leader could then borrow more, spend more and hope to shore up the Conservatives’ flagging public support. That in turn could force a Bank of England rate hike faster than many investors currently expect.
The government’s tough targets right now
“On paper, the Conservatives still have restrictive fiscal targets,” according to Tombs.
The Tories are still committed officially to wiping out borrowing completely by the middle of the 2020s, as well as keeping borrowing below 2% of GDP next year.
But Tombs says plans to cut borrowing from its current 1.3% of GDP to 0.8% in 2020-21 are “highly unlikely to be implemented.”
The public want more spending
Tombs says the Tories “desperately need to rebuild public support,” given approval ratings of around 21% in recent polls as confidence has plummeted in prime minister Theresa May’s government.
The Conservatives’ troubles are not only over Brexit. Tombs says public attitudes to austerity have “shifted sharply,” with rising support for higher spending as concerns fade over the public finances and public services buckle.
READ MORE: Why Matt Hancock pulled out of the Tory leadership race
Years of spending cuts have taken a heavy toll in recent years, leaving schools, hospitals, police forces and countless other frontline services struggling to cope with sometimes unprecedented pressures.
The remaining candidates in the race to be Tory leader - Boris Johnson, Michael Gove, Jeremy Hunt, Sajid Javid, Dominic Raab and Rory Stewart - are therefore under big pressure to loosen the purse strings.
The candidates need to win over not only the public in future, but also Tory MPs, party members and the media with eye-catching and popular pledges.
The Tory contenders’ plans to splurge
Johnson plans to cut the 40% tax rate for higher earners taking home between £50,000 and £80,00 a year.
Gove promises he will scrap VAT, which raises £135bn a year, replacing it with a lower and more variable sales tax.
READ MORE: Firms told to plan for no-deal Brexit under new Tory prime minister
Javid has said he would abolish the highest 45% income tax rate altogether, and slow the speed of deficit reduction.
Raab says he will spend £5bn cutting the basic income tax rate by 1% and cut national insurance contributions for the lower-paid.
Stewart’s spending plans including doubling budgets for climate change and environmental policies.
What the next prime minister could do
“Political motivations will trump fiscal rectitude,” notes Tombs. He said public borrowing, or the structural deficit, could be 1% higher than currently planned by 2021-22, the year before the next planned election.
Proposals by one conservative think tank to relax the government’s borrowing rules are already rapidly gaining currency within the Tory ranks, potentially freeing up significant extra cash for tax cuts or public spending.
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Several leading Tories have come out in support of the Onward think tank’s proposal to merely keep the debt to GDP ratio “falling gently in normal years when there is no recession.”
“Much of the headroom a new fiscal rule would open up should rightly be used to improve public service,” said Onward in its recent report.
More borrowing could push up interest rates
Tombs said higher borrowing could make an interest rate hike more likely and swifter from the Bank of England than widely expected.
“It will have to counter looser fiscal policy by raising interest rates,” said Tombs.
But he said investors were giving “insufficient weight” to the proposals because they were far more focused on the chances of a no-deal Brexit keeping rates down.
READ MORE: CBI says no-deal threats are like saying ‘I’ll shoot my foot off’
