Johnson Clears Path to Fiscal Stimulus

Last week as Boris Johnson was conducting his first cabinet reshuffle as prime minister, not many participants in the market gave it more than a cursory glance. That was until the news broke that Sajid Javid, Chancellor of the Exchequer, had resigned after refusing to dispose of his special advisors. Immediately all market participants, including us, became very interested.

Often seen as a number two to the PM, the chancellor is a hugely influential figure in government, deciding on the budgets of each department and giving final approval or denial to major policy. This dynamic can often lead to friction between the PM and chancellor (such as the often fractious relationship between Tony Blair and Gordon Brown), and it was well known towards the end of last year that tensions were arising within the current administration. While Johnson has been keen for a huge fiscal expansion to boost the UK economy, after years of austerity and Brexit uncertainty, it was known that Javid lent towards prudence, balancing the books and trying to veto potential tax cuts, among other proposals.

Johnson has replaced Javid with Rishi Sunak, previously Chief Secretary to the Treasury. Sunak is relatively new to frontline politics, having previously had a career in the markets – including at Goldman Sachs and the hedge fund TCIF. He is known to be a staunch Johnson supporter, having campaigned for him to become leader of the Conservative party and the country last year. It is therefore no surprise that he was willing to take the chancellor role without a designated advisory team and thus, it could be argued, highly reliant on and intertwined with the office of the PM. Johnson has centralised power and removed a sizeable obstacle to his fiscal plans.

Next month’s budget now has the green light to be Johnson’s fiscal bazooka, with tax cuts, housing schemes and infrastructure projects already mooted. Assuming the UK agrees a workable deal with the EU, we believe that investment and entrepreneurial spirit will return – supported and incentivised by new fiscal expansion that could lead the UK economy to outperform its forecasts in 2020 and 2021. And while the assumption of a smooth trade deal could be seen as optimistic, it seems the current UK growth forecasts of 0.8% and 1.4% for 2020 and 2021 respectively (according to the Bank of England) have a large amount of caution baked in. Consequently, we could see these numbers revised upwards after the forthcoming budget.

Finally, could UK fiscal expansion result in a change in policy further afield? Central bankers, politicians and commentators in Europe have been calling for more government action for some time now. Perhaps some positive results from the UK could finally lead to fiscal action in Europe as it looks across the channel to its ex-partner.