◼ ECONOMICS Bloomberg Businessweek March 2, 202024
U.K. Prime Minister Boris Johnson led his
Conservative Party to its biggest victory in a
national election since the days of Margaret
Thatcher by persuading voters in former industrial
heartlands to vote Tory for the first time. Johnson
promised to “get Brexit done” after years of polit-
ical gridlock and duly delivered on Jan. 31, when
Britain formally left the European Union. But if he
is to retain support in some of the poorest parts of
the country, he must now address the grievances of
those who feel economically marginalized.
As the face of the 2016 campaign to leave
the EU, Johnson skillfully harnessed anger over
almost a decade of cuts to public services and the
erosion of living standards to build support for
Brexit. Now he’s promised to “level up” strug-
gling regions, leaving no doubt that Britain is
about to open the spending taps. The only ques-
tion is how much. The answer will be contained
in the boxy red briefcase that the finance min-
ister, Rishi Sunak, will carry into Parliament on
March 11, when he presents the administration’s
first budget. (The so-called red box ritual dates to
the 1860s.)
A power struggle over who should control the
economy—Johnson or the Treasury—saw Sunak’s
predecessor, Sajid Javid, resign on Feb. 13. The
appointment of Sunak, a young politician who
owes his meteoric rise to the new prime minister,
has fueled speculation that the boost in spend-
ing for the fiscal year that begins in April could
be even greater than the more than £30 billion
($39 billion) Javid had pledged.
Either way, Britain is headed for the biggest
fiscal stimulus since the early 2000s, when the
Labour Party was in power. The expectation is
that the U.K.’s budget deficit is set to increase sig-
nificantly from the £44 billion or so estimated for
the current fiscal year. Investors appear sanguine
about the prospect, with yields on government
bonds close to record lows.
For now, Johnson is basking in what’s being
called the “Boris bounce.” His election win
removed the crippling uncertainty over Brexit,
buoying confidence among businesses and
consumers. London home prices are growing at
their fastest pace in more than two years. Both
S&P Global Ratings and Fitch Ratings upgradedtheir U.K. assessment after the election.
If Johnson gets it right, the budget could buttress
the economy at a challenging time, as the spreading
coronavirus roils global markets and Britain begins
the enormous task of negotiating a trade deal with
the EU. If talks fail, the country will once again face
a disruptive rupture with its largest trading partner.
Politically, the budget could also help bolster
Johnson’s power. It’s early days, but he has a huge
80-seat majority in the House of Commons, and
Labour is still reeling from its worst election result
since 1935.
The Conservatives inherited a budget defi-
cit equal to 10% of gross domestic product, the
highest in British peacetime, when they took
office in 2010 in the aftermath of the financial cri-
sis. The shortfall is now just under 2%. But the
squeeze—amounting to more than £100 billion of
spending cuts and tax increases over the course
of a decade—has been brutal. The National Health
Service and education were protected, but few
other areas of society escaped the ax. Deep cuts
were made to welfare and social care. A debate
over the links between rising knife crime and cut-
backs to funding for policing and community cen-
ters rages on.
The impact of austerity was back in the spot-
light in late February when a nonpartisan study
found that life expectancy in England stalled
over the past decade for the first time in more
than a century and is in outright decline among
women in the poorest regions, such as North East
England. Its author, Michael Marmot, who heads
the Institute of Health Equity at University College
London, blames spending cuts that have left many
resorting to food handouts and insecure, low-paid
work. “If health has stopped improving, it is a sign
that society has stopped improving,” he says.
Johnson’s budget is expected to target areas
such as the North East and the Midlands with
billions of pounds for infrastructure, on top of
money already pledged for public services such
as schools, hospitals, and policing. Javid commit-
ted himself to balancing day-to-day spending and
revenue but gave himself room to spend an extra
£20 billion on capital projects including railways,
roads, and broadband networks. As those fiscal
rules were election commitments rather than3%2 %1 %0 %▼ U.K. real GDP growth,
year-over-year
◼Projected2013 202210%5 %0 %▼ U.K. budget deficit as
share of GDP2008 2018● The U.K. prime minister is poised to bring a decade of painful austerity to a closePutting a Price on the Boris Bounce