Boris the big spender? Scotland is watching

Image copyright EPA
Image caption Boris Johnson was elected new Conservative Party leader and takes on the post of UK PM
  • The new prime minister takes office with some big spending commitments from the campaign trail, and big uncertainties about how much money will be available.
  • Some policy changes will affect Scotland directly. Others could force Holyrood ministers to take action to offset the implications.
  • He'll have to be wary of the unexpected coming from the economy and from outside Britain, including storm clouds from Donald Trump's trade wars.

Boris Johnson arrives in Downing Street today, with high expectations from his supporters.

However, his lack of experience with anything resembling a budget or a spending department has business lobbies nervous, economists alarmed, and fiscal conservatives wondering what they've let themselves in for.

So some questions. For starters, do the public finances offer much room for manoeuvre for Boris Johnson and his cabinet?

They're in much better shape than they have been - much of that achievement as a result of the austerity years. The deficit is low, by historic standards, but still not down to zero.

That was something targeted for 2015. Under Theresa May and Phillip Hammond, it was pushed back to the middle of next decade, and with Boris Johnson in charge, it now seems to be disappearing over the horizon.

Debt, which is what you get from many years of deficits, should now be falling as a share of national income, which is the target that was set.

Phillip Hammond, the departing Chancellor, has talked about headroom to deal with possible difficulties from Brexit. That's the amount before he'd begin to bump up against the ceiling of what he could achieve within his fiscal rules.

But that's not to say the rules will still apply after today, when we get a new Chancellor.

Eye-watering

Boris Johnson, as candidate, has been eager to spend the headroom that he's got. He'd also like to spend the proceeds from not paying tens of billions which Brussels said is owed from commitments the UK has already made.

He's been less willing to contemplate the huge cost to the government's finances, and to the economy, forecast for a no deal Brexit by, pretty much, every reputable economist.

The Office for Budget Responsibility last week put out its assessment of leaving the EU without a deal.

It was eye-watering, from lower output from the economy, starting with a recession, lower income and lower tax receipts, from a rise in unemployment benefit costs.

There would be the requirement to support several sectors of the economy that are exposed to a sharp cut in trade.

Image copyright PA Media
Image caption What big fish will Boris Johnson be frying once he is in office?

Yet Boris Johnson has been making some expensive promises on the campaign trail. How can he deliver on them?

The first promise was to raise the level at which middle to high earners start to pay higher rate tax, clearly aimed at the Tory membership.

The Boris campaign itself reckoned that would leave a £9.6bn hole in Treasury receipts.

We later got a promise to cut tax for lower earners, including a higher starting point for national insurance contributions, which currently start being deducted from £8,600 in annual income. To get that up to £12,500, where you start paying income tax, would cost around £11bn.

He's also got a shopping list for infrastructure, more police officers, schools spending, vocational education, broadband, replacing farm subsidies after exiting the European Union, increasing the minimum wage for over-25s and removing many homes from transaction tax, south of the border. He didn't hold back on the campaign trail.

That's why Phillip Hammond had to issue a warning to candidates to rein it in with the spending pledges. It was all conspicuously, fiscally unconservative.

If he is going to deliver on the expectations raised, he is going to have to start talking more cautiously in terms of priorities and when some of the promises might be achievable.

An £80,000 threshold for higher rate income tax - except in Scotland, of course, where such threshold decisions on income tax are devolved - that threshold could become a target, over time.

If he's going to fight an election soon, he'll need to balance that with attention being paid to lower and middle income earners, who have more votes, and are in marginal constituencies.

Given he has very little knowledge of economics, but a big appetite for pleasing people with big gestures, my hunch is that there could be tensions ahead with the person he chooses to put into the Chancellor's residence in 11 Downing Street.

What about Scotland?

It's worth noting how all this affects Scotland differently. Some would apply, like a shift in the threshold for national insurance contributions.

Others would force the Scottish finance minister to adapt to knock-on effects, including on homes transaction tax. There has been a warning that removing homes under £500,000 from English transaction tax would hurt investment in Scottish property.

More significant would be the impact of a rise in Westminster's threshold for higher rate (40%) income tax, from £50,000 to £80,000. There's already a gap on that score between Scotland and the rest of the UK, and the rate is one percentage point higher in Scotland.

If that threshold gap increases, the incentives for higher earners to shift their earnings or themselves into England would be significantly higher.

Then, if he's spending more on schools and police in England, there should be a rise in the amount coming to Holyrood through the Barnett formula - though for MSPs to decide how it's spent.

But as Mayor of London, he has criticised the Barnett formula as it distributes funds to Scotland, Wales and Northern Ireland - saying you get more bang for your buck in Greater London. He'll have to clarify early on what his opinion is on that.

'Get a grip' message from business

Business also has reason to mull over Boris Johnson's past statements, notably the recent, fruity one on what should happen to businesses that criticise the implications of Brexit.

The election of the new Conservative leader saw a long queue of business lobby groups lining up to lecture the new PM on the need to look after business interests.

In normal times, it shouldn't need to be said, at least publicly given the closeness of Tories and business. But recent years have seen unprecedented strains in those relationship.

The key one they all want is to avoid a disorderly Brexit. They want more certainty. They have a long shopping list of changes to tax reliefs, reform to business rates and so on.

But Brexit stands out as the big issue, on which they have ceased to be cautious in their language.

Liz Cameron, at the Scottish Chambers of Commerce has a blunt message to Boris Johnson and the reshuffled cabinet to "get a grip".

"The time for campaigning is over," she said. "We need to know, in concrete terms, what your government will do to avoid a messy, disorderly Brexit on the 31st of October.

"The economy of Scotland and the UK is on a knife's edge."

Carolyn Fairbairn, DG of the CBI, called for three things in the first 100 days;

  • a Brexit deal that unlocks confidence
  • clear signals the UK is open for business
  • and a truly pro-enterprise vision for our country.

She's suggesting that getting a deal on Brexit doesn't just avoid trouble - it could unleash investment. The CBI is after early signals, from a more flexible approach to immigration and to infrastructure spending.

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Image caption Boris Johnson will look to have talks on future trade relations with US President Donald Trump

As with any prime minister, it is unexpected events that can shape their economic record, including those from outside Britain and outside government. Just ask Gordon Brown.

The CBI this week issued manufacturing survey figures, which are monthly, and which, for July are truly dire, with a sharp fall in new orders for both domestic and export markets.

Uncertainty is weighing heavily on the British economy. Stockpiling for the March deadline for Brexit was then postponed, so the stockpiling unwound into de-stocking. We could now see stockpiling returning ahead of the Halloween deadline, disrupting advance orders for the Christmas shopping season.

The European economy has slowed up recently, so that Britain doesn't look as bad relative to its comparators as it did.

For the bigger picture, the oil market is nervy about tensions with Iran. America and China remain key drivers, and their trade war, driven by President Trump's use and threat of tariffs, remains one of the key concerns about sustained global growth.