July 3, 2017 / 1:17 PM / 21 days ago

Theresa May’s dilemma is Mark Carney’s opportunity

3 Min Read

A gallery assistant holds a 2-pound coin with the new portrait of Britain's Queen Elizabeth following it's unveiling at the National Portrait Gallery in London March 2, 2015. This is the fifth portrait of the Queen to be used on a British coin during her reign.Suzanne Plunkett

LONDON (Reuters Breakingviews) - British Prime Minister Theresa May has the chance to make a virtue of political necessity. Her fragile minority government is under mounting pressure to spend more on a range of fronts. Loosening the purse strings would help both the economy and Bank of England Governor Mark Carney.

Members of May’s own cabinet are calling for the government to abandon a 1 percent cap on pay hikes for public employees, which is squeezing the disposable incomes of nurses and teachers. Allowing public sector pay to rise at the same rate as the private sector would cost an extra 6.3 billion pounds in 2019-20, rising to 9.2 billion pounds in 2021-22, the Institute for Fiscal Studies estimates. Nor would this be the only unscheduled call on the public purse.

The government has pledged 1 billion pounds extra for Northern Ireland over two years as a quid pro quo for securing the support of the province's biggest Protestant party. Planned cuts of 3 billion pounds in funding for local authorities may be revisited after the deadly fire in a London tower block. Meanwhile, slower-than-expected growth will depress tax receipts.

Too much is in flux at this stage for private economists to form an accurate picture of the slippage in the budget. But most agree that Finance Minister Philip Hammond is increasingly likely to miss his goal of turning a budget deficit that was worth 46.6 billion pounds, or 2.4 percent of GDP, in the last financial year into a surplus by the mid-2020s. That’s especially true as the government is unlikely to have much appetite for unpopular tax hikes.

That’s not great news for the UK gilt market, since bond prices typically fall when governments borrow more. But it could give the Bank of England an opportunity to raise rates to rein in inflation and curb consumer borrowing, which has been growing at double-digit rates. For seven years, Britain has combined tight controls on spending with loose monetary policy. Changing the mix now makes sense. Conveniently, self-interest may force politicians to do the right thing.

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