February 13, 2020 / 3:28 PM / 2 months ago

Breakingviews - Revolving Treasury door may crush UK budget rigour

Britain's Chief Secretary to the Treasury Rishi Sunak is seen outside Downing Street in London, Britain, October 8, 2019.

LONDON (Reuters Breakingviews) - The revolving door at Britain’s Treasury may crush any semblance of budget discipline. Sajid Javid on Thursday unexpectedly quit as finance minister only two months after the UK’s general election, to be replaced by his deputy Rishi Sunak. The latter may be a Goldman Sachs alumnus, but his political instincts will trump his financial ones.

Javid’s exit, which makes him the shortest-serving chancellor since 1970, was prompted by Prime Minister Boris Johnson’s demand that he sack his advisers and replace them with ones from his boss’s office, a source told Reuters. Any of Javid’s predecessors in at least three decades would have given this short shrift - a sign of the power now concentrated in Johnson’s entourage.

True, Sunak has decent credentials on paper. As chief secretary to the Treasury he was responsible for public spending. And before entering politics, he worked for Goldman and activist hedge fund TCI. He also has family connections in business: his father-in-law is Indian billionaire and co-founder of IT services company Infosys, Narayana Murthy.

But that’s all less important than his ability to toe the party line and sell Johnson’s ideas in the media. It’s a job he performed so slickly that he even stood in for the prime minister in some television debates before December’s election. He may therefore be more pliable than Javid.

Sunak’s former boss kept a lid on Conservative election spending pledges and committed not to borrow over the long term to fund so-called current spending. More recently, Javid was reported by the Financial Times to be considering tax increases on higher earners in the budget scheduled for March 11. Some of the mooted ideas would have hit traditional Conservative voters but helped finance more capital spending in underperforming regions.

Johnson’s new finance minister may be readier to increase spending without offsetting them with politically damaging tax hikes. Years of austerity have reduced the budget deficit to around 2% of GDP, a fifth of the shortfall in 2010. But Johnson has already pledged to send up to 20 billion pounds ($26 billion) a year in extra investment in road, rail and other infrastructure. Low bond yields make that a reasonable plan. Still, a profligate finance minister who tears up the fiscal rules might find it more expensive to borrow the money.

Breakingviews

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