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Britain's new Chancellor of the Exchequer Rishi Sunak leaves Downing Street after a cabinet meeting in London on February 14. His family connections to the Indian IT industry could have positive spin-offs in trade relations between Britain and India. Photo: EPA-EFE
Opinion
David Brown
David Brown

If Britain’s grand post-Brexit budget doesn’t add up, markets may be in for a rough ride

  • Boris Johnson is clearing the decks for a massive public spending binge to revitalise the economy. The cornerstone is a rail project that is running over budget and might involve the Chinese. Markets are wondering who will pick up the tab
David Brown
David Brown
Why you can trust SCMP
After all those years of Brexit-induced political turmoil in Britain, it might seem strange to think the country could be on the cusp of a new economic renaissance. It’s been so hard to quantify the cost of jumping ship from the European Union, it’s no wonder deep pessimism persists, leaving markets struggling to work out whether it’s good or bad news for growth.
Under Prime Minister Boris Johnson, Britain’s political landscape has changed dramatically but the economic consequences are still unclear. Johnson has his sights set on investment-led recovery and wants to diversify Britain’s trade dependence away from Europe, towards the United States and Asia, especially China and India. Whether he pulls off a new supply-side revolution remains to be seen. 
Without a doubt, life will be much tougher for British business outside Europe’s single market. Unless Johnson is prepared to eat humble pie and accept tougher conditions for easy access to the EU’s customs union, a hard break-up is on the cards.

Trade barriers will go up, the cost of doing business in Europe will rise for British firms and bilateral trade flows will decline, a no-win situation for both sides. It’s no wonder expectations are so downbeat for the British and European economies in the next few years.

Forecasts from the International Monetary Fund and the Organisation for Economic Cooperation and Development suggest Britain could be bogged down by years of economic stagnation, with growth averaging little more than 1 per cent per annum for the next few years.

Johnson’s post-Brexit Global Britain sounds good, but that’s about it

Johnson is clearing the decks for a massive public spending binge to revitalise the British economy. Money seems no object with new commitments planned for transport, communications, health, education, more police and better prisons, plus a whole host of other measures to improve economic performance.
The cornerstone will be a High Speed 2 or HS2 rail project to improve transport links to the north of the country. Expected costs are running well over the £56 billion (US$73 billion) budgeted back in 2015, with recent estimates spiralling past £100 billion.

Johnson is harking back to a time when Britain’s industrial revolution was forged on the back of an explosive railway boom. He’s clearly hoping history will repeat itself.

Opposition to his spending plans is being swiftly dealt with. Rising political star Rishi Sunak has been rushed in to replace Sajid Javid as chancellor of the exchequer, while the Treasury, normally the backstop that provides checks and balances on public spending, has seen its powers reined in by the prime minister’s office.
Source: New View Economics

It’s a shrewd move because Sunak will be rubber-stamping spending plans, while his family connections to the Indian IT industry could have positive spin-offs in trade relations between Britain and India.

Britain ignored US on Huawei. Canada can do same with Meng

Meanwhile, Johnson’s decision to allow Chinese firm Huawei to play a role in developing Britain’s 5G networks (despite US concerns) and early discussions about China’s involvement in the HS2 project show a growing willingness to do more business with Asia.

It looks good on paper, but do the sums add up? Johnson is spending money like water and markets are quite rightly asking who will pick up the tab. Higher taxes are generally ruled out by Conservative Party orthodoxy so extra government borrowing has to bridge the gap.

Painful austerity cutbacks reduced the British government’s deficit from 10.3 per cent of GDP in 2009 to around 2.5 per cent last year, but future widening looks more likely now. Stronger growth should be good for British stocks and the pound, but it will come at the cost of increased bond issuance, higher debt yields and rising short-term interest rates.

Johnson’s vision for Britain’s future is a bold one. If he wants an economic renaissance, it’s going to take a lot of money, ingenuity and time. The worry is that this is a pipe dream and next month’s budget could be a rude awakening for taxpayers, investors and markets.

David Brown is chief executive of New View Economics

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