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Coronavirus to limit spending push at UK budget showpiece

By William Schomberg
FILE PHOTO: Britain's Prime Minister Boris Johnson speaks during his first Cabinet meeting next to a new appointed Chancellor of the Exchequer, Rishi Sunak, following a reshuffle the day before, at Downing Street in London

By William Schomberg

LONDON (Reuters) - Britain's first post-Brexit budget was supposed to be when Prime Minister Boris Johnson began to meet his promise to "level up" the country's struggling regions. Instead, it looks destined to be dominated by the spread of coronavirus.

Finance minister Rishi Sunak will announce the tax and spending plans of Johnson's new government in parliament on Wednesday, typically a high-profile event setting out the priorities for the next five years.

But Sunak, a 39 year-old former Goldman Sachs investment banker who has only been in the job for a month, will have to use up some of the precious leeway in the public finances to fight the spread of coronavirus and soften its hit for business.

Voters who switched traditional allegiances to back Johnson in December's election will have to wait for full details of his plans for new railways, roads and other infrastructure investment.

Also restricting Sunak's options is the risk that Britain and the European Union fail to agree a trade deal which would deliver a shock to the world's fifth-biggest economy.

Samuel Tombs, an economist with Pantheon Macroeconomics, said Johnson's expensive election pledges, including a social security contributions cut and 100 billion pounds more public investment by the mid-2020s, mean Sunak only has room to tinker.

"He doesn't know how costly the coronavirus outbreak will be, nor the outcome of Brexit trade talks," Tombs said. "He likely will preserve his firepower for 2021, when it will be the government's priority to show that Brexit is a success."

Government officials have promised support for companies struggling with the effects of coronavirus. Airline FlyBe collapsed this week and manufacturers have reported a jump in delays in supplies, many of them from China.

The Bank of England has so far said it needs to see more evidence before of the virus' impact before following the lead of the U.S. Federal Reserve and cutting interest rates. But it could help by reviving incentives for bank lending to companies.

Sunak and BoE Governor Mark Carney have discussed how to respond to the virus, raising speculation about a possible joint move next week.


CUMMINGS PRESSURE

Sunak is believed to be under pressure from Johnson's powerful chief advisor Dominic Cummings to increase spending, demands which contributed to the resignation last month of Sunak's predecessor as finance minister Sajid Javid.

But at the same time he cannot risk losing the confidence of investors by adding a lot more expenditure to the biggest increase in day-to-day spending in 15 years which Javid announced last September.

"While fiscal credibility may not be as visible on the government's list of priorities as previously, it will still be there," economists at Investec, a bank, said in a note to clients. "Borrowing at record low rates does depend on this remaining intact."

One option for Sunak is to tweak rather than dump the self-imposed public finance rules that he inherited from Javid.

The toughest of those rules is a pledge to balance day-to-day government spending with tax revenues within three years.

That target will be made all the harder if Britain's official budget forecasters cut their economic growth forecasts, as expected, on Wednesday.

Sunak might lengthen the deadline to five years, or adopt a less restrictive method of measuring the deficit, as previous finance ministers have done.

But the head of an influential think-tank, the Institute for Fiscal Studies, said the time had come for the government to stop changing budget rules to allow itself more borrowing.

"We have already had 16 fiscal targets in a decade... Mr Sunak should resist the temptation to announce another and instead recognise that more spending must require more tax," IFS director Paul Johnson said at a pre-budget briefing last week.


(Additional reporting by William James; Writing by William Schomberg; Editing by Toby Chopra)