Rishi Sunak's Bag of Goodies

Updated : March 14, 2020 03:59 PM IST

It turned out on Budget Day to be a bag of plenty, packed with promises of expansive spending by the government over its five-year term just begun.

And then there’s that frightening elephant lurking in business boardrooms as much as on the street – coronavirus.

That old red briefcase that new Chancellor of the Exchequer in the UK Rishi Sunak held up for the cameras was never expected to produce quite as many goodies as it did. It turned out on Budget Day to be a bag of plenty, packed with promises of expansive spending by the government over its five-year term just begun. Much of that spending will be in the north of the country; the north voted Conservative as never before, and it shall be duly rewarded.

London Eye

Any budget is nothing if not a numbers game. In this one, a few numbers tell the story or enough of it. The government has promised to spend 175 billion pounds more through its five-year term while planning to raise 25 billion pounds more in tax. In everyday language, someone would call this quite an overdraft, and be right. The added numbers push gross capital investment from the government to 640 billion pounds over the next five years. Where will the money difference come from? Borrowing of course.

That kicks up the second set of numbers, that really came first. Just ahead of the budget, The Bank of England announced a cut in interest rates from 0.75 percent to 0.25 percent. It made borrowing cheaper than ever. And so Rishi Sunak announced within minutes it seemed, those heavy borrowing plans because borrowing was now so cheap. "The central judgement I'm making today is to fund an additional 175 billion pounds over the next five years for our future prosperity," he told the BBC in an interview. Borrowing, he said, is "the right economic thing to do" and he is "not going to make an apology" over it.

This had been coming, not just announced in effect in the Conservative Party manifesto, but demanded by the economy, the Conservative Party believed, after a policy of severe cuts in government spending through the years of George Osborne who was Chancellor 2010-2016. Osborne’s policy was driven by what’s now considered the old-fashioned game of balancing the books by cutting spending to cut debt. The trendier and happier sounding reversal of that is back with Rishi Sunak, who seems to have gone miles further than his predecessor Sajid Javid apparently was prepared to. Sunak believes that the new spending will drive growth 0.5 percent higher a year over the next two years.

That’s where we begin to enter a realm of speculation that is more hopeful than helpful. Reasons enough come crowding in to limit optimism that actual growth might follow government spending proportionately, or even, as hoped no doubt, to bring a disproportionately higher movement in the economy. For a start, government handouts don’t quite work the way of organic business growth. They may stimulate some business but do not replace the far more rea growth that accompanies successful business. Oddly, governments have found often that an excess of cash is not always as easy to spend as it might seem. So we know already that particular roads will be widened and so on under these plans, train services improved, better Internet cover offered. Promising developments, promising development too, but not necessarily in a one-to-one correlation with economic growth.

Particularly when that borrowed government money has to be repaid, even if at almost no interest. The debt will rocket as Britain enters uncertain times as never before. Most of Britain’s business and trade is with the EU, as it would be. Following the divorce, EU firms cannot be natural partners in this growth – their exclusion might be less cheering for business than the cheerleaders of the Leave campaign would have us believe. Of that brave new trade agreement with the US, we’ve had serial promises now but no sign. Brexit could end up undoing the very things it promised.

And then there’s that frightening elephant lurking in business boardrooms as much as on the street – coronavirus. Fears arise every day, and they rise by the day, on just what kind of economic plans it could trample upon, and for how long. Rishi Sunak has said the National Health Service will simply get all it needs to tackle coronavirus. Well said, but that still does not erase the question where it will all come from. From growth, ideally. If that is any less than what’s hoped for – and it does have this notorious way of falling short - the unbalancing will need rebalancing from future budgets. Everyone in Britain wants to believe that the baton will not drop along the way.

London Eye is a weekly column by CNBC-TV18’s Sanjay Suri, which gives a peek at business-as-unusual from London and around.

Read his columns here.

Rishi Sunak's Bag of Goodies

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