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Rishi Sunak’s ‘Whatever It Takes’ Moment

Therese Raphael
·5-min read

(Bloomberg Opinion) -- Britain’s new Chancellor of the Exchequer, Rishi Sunak, hit the talk shows on Sunday to speak about everything except what will be in Wednesday’s budget. Even so, one thing was clear: It’s going to be a budget of two halves, as sports commentators like to say.

One half is delivering on a range of Conservative manifesto commitments, especially massive infrastructure spending to rebalance the economy from London and the south to the “left behind” regions of the north. The other will be dedicated to responding to the coronavirus outbreak.

It’s that half that makes this Sunak’s “whatever it takes” moment, to use the motto of former European Central Bank President Mario Draghi during the financial crisis.

No budget since the financial crisis has been drafted with this level of uncertainty hanging over the economy. Not only is the U.K.’s future relationship with its closest trading partner yet to be determined (negotiations have just started and nobody would describe the road ahead as smooth), but the scale of the disruption from the outbreak is unclear. Everything from oil prices, to growth and revenue projections is in flux as the Office for Budget Responsibility sets out its new forecasts.

This budget will ultimately be judged on how effectively policy levers are used to limit the virus’s economic fallout.

The panic-buying of toilet paper in the U.K. was just one indicator of how tricky it will be to get the balance right. The virus hasn’t just caused a supply shock, as production lines from China to Italy and other countries are upset. More worrying is a potentially severe impact on the demand side as fear sets in. Behavioral changes may be hard to shift.

Security first is a good rule. Fiscal policy should be used foremost to do everything possible to minimize the spread of the disease, ensuring front-line agencies have all the necessary funds and providing relief for the most vulnerable segments of society. The government will want to target policies to assist those individuals and businesses most sensitive to a crisis, especially small- and medium-sized firms. These could include allowing delays to tax and other payments from companies hit by a temporary liquidity crisis. These are potentially large sums.

While Prime Minister Boris Johnson has promised 46 million pounds ($60.4 million) to help develop a vaccine, that is clearly a drop in the bucket compared to what will be required to support those affected by the disease, especially given an already stretched National Health Service. Italy, with the most cases outside of China, has already said it would spend 7.5 billion euros ($8.6 billion) on fiscal measures, including tax credits and wage supplements for the areas most affected.

One way for the U.K. to meet the demands would be to relax the already loosened fiscal rules set by Sunak’s predecessor Sajid Javid. The government had pledged to use revenues to cover day-to-day expenditure; to lower the public debt (with a cap on spending on debt interest as a share of government revenue); and to limit public sector net investment (capital spending minus depreciation) to 3% of GDP. Given the government’s big spending plans, the virus crisis and the uncertainty of Brexit — or rather the certainty of Brexit costs — Sunak is likely to want a little added flexibility. The markets will probably not begrudge him that.

He’d hardly be the first chancellor to move the goalposts. There have been some 16 different fiscal targets over the last decade, most honored in the breach. Even so, fiscal rules are important in signalling government discipline. Deferring many of the tougher policy decisions (and specific spending pledges) to the autumn budget will buy some much-needed time to better understand the costs of the virus and also the new U.K.-EU trade relationship.

A significant or prolonged disruption, however, would require bigger budget decisions down the road. We saw the government stand aside last week as Flybe lost its battle for solvency. That was surely right given Flybe’s underlying problems. What if more systemically important companies teeter? Is the government willing to recapitalize (effectively nationalize) those faced with the threat of bankruptcy, if it comes to that?

For now, Johnson and Sunak could do worse than look at Singapore’s example. The city-state, often held out as a model for post-Brexit Britain, recently unveiled a major stimulus budget that aggressively looks to provide security in the face of the virus, but also focuses on long-term goals at a time of slower growth and pronounced uncertainty. It included tax rebates for corporations, help for SMEs to access financing along with other stimulus measures.

The U.K. is a much larger economy with far different challenges, including Brexit and large regional inequalities. Singapore also seems to have managed to quickly contain the virus’s spread there. But Singapore’s broader objectives — providing worker training, limiting immigration, fighting climate change and promoting business investment and growth — are not unlike the Johnson’s post-Brexit goals.

Ultimately, a budget is about making choices. Johnson wants to pioneer a new kind of interventionism, one targeted at boosting the supply side of Britain’s economy and “leveling up” the poorer parts of the country. There is much to recommend that agenda, even if Britain’s EU departure also complicates it. But getting that done will be much harder if the government sticks to populist pledges — such as refusing to extend the Brexit transition period to allow more time for EU trade talks, or insisting on a new immigration system that keeps out low-skilled workers and which the OBR says will reduce output.

These are all decisions that will determine the long-term legacy of this government. Meanwhile, the first big test of trust is finding the right set of policy levers to address a threat Sunak cannot yet precisely define.

To contact the author of this story: Therese Raphael at traphael4@bloomberg.net

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Therese Raphael writes editorials on European politics and economics for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.

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