Boris Johnson’s thumping election victory was greeted as “Christmas come early” by wealth managers as sterling and UK stocks climbed on Friday morning. Investors who feared a high-tax Corbyn government now hope that greater clarity on Brexit — along with a sizeable fiscal stimulus — will boost business confidence and rekindle growth in a sputtering economy.
City economists also said the size of the Conservative majority could be helpful in giving the government political space for compromise in post-Brexit trade talks with the EU, and potentially allow it to spend more than the party’s manifesto promised on ending austerity.
But ministers will swiftly find themselves facing some difficult economic realities. Business groups say there are still big barriers to resuming investment and Frances O’Grady, general secretary of the TUC, warned the prime minister to expect the “shortest honeymoon ever” if he failed to improve living standards and public services.
Here are four big challenges Mr Johnson and chancellor Sajid Javid will need to tackle in the first months of the new parliament.
1) Appointing a Bank of England governor
At the top of the chancellor’s in-tray will be the shortlist of candidates in contention to replace Mark Carney when he leaves the Bank of England early next year.
Whoever Mr Javid picks, the new governor will need to hit the ground running. The Monetary Policy Committee was split at its last meeting between a majority who expect growth and inflation to pick up once a Brexit deal is in place, and a minority favouring an immediate rate cut to support the economy. Mr Carney’s successor could determine the balance of opinion on the committee.
2) Framing a first Budget
A big question is whether Mr Javid will now feel able to ramp up a fiscal stimulus that many economists believe will be the main support to growth over the coming year.
The Conservatives have promised to end austerity — spending more on police, schools and hospitals — while freezing or cutting personal taxes. It will be difficult for Mr Javid to keep both promises without breaking his pledge to balance the current budget.
However, the chancellor could now announce a much bigger increase in capital spending: his new fiscal rules allow for £20bn of new investment spending each year, and the pledges set out in the party’s manifesto allocate only £8.2bn.
“Fiscal policy has been an enormous headwind for almost 10 years. It is about to become a major tailwind,” said Karen Ward, strategist at JPMorgan Asset Management.
Paul Dales, at the consultancy Capital Economics, warned that because of the time lag involved in starting big public infrastructure projects, “the risk is that the size [of fiscal stimulus] is slower than we think initially and the recovery in growth slower”.
3) Kick-starting growth
The election took place against a dismal economic backdrop, with the latest data showing growth stagnating and a strong labour market starting to falter. Before the vote, economists were expecting GDP to grow just 1.1 per cent in 2020, according to an average of forecasts collated by Consensus Economics.
Although fiscal stimulus will help boost growth, the real question is whether businesses will become more confident about hiring and spending.
Despite some optimism from the business community, many economists see little prospect of a rapid recovery in private sector investment, arguing that businesses’ relief at escaping a radical Labour shake-up will soon turn to worry over Mr Johnson’s unrealistic pledge to wrap up trade talks with the EU within a year — with a new Brexit cliff edge looming at the end of 2020.
“Optimism on Brexit could soon wane,” warned Paul Hollingsworth, at BNP Paribas. He added that it was not yet clear whether the prime minister would use his new-found flexibility to aim for a softer Brexit deal, or stick to the harder relationship he had advocated so far.
Kallum Pickering, economist at Berenberg, was more upbeat about near term growth, arguing that with a big majority, Mr Johnson will find it easier to override Eurosceptic MPs and ask for a longer transition. But he also warned that Brexit will constrain growth in the longer term.
“Brexit is a losing game for the economy . . . only a question of when and how much additional pain will be inflicted,” said Samuel Tombs at the consultancy Pantheon Macroeconomics.
4) Looking beyond Brexit
Businesses are hoping that an orderly Brexit in January will give ministers the bandwidth to address longer term challenges — from domestic problems such as housing and skills, to questions over the future shape of immigration policy and the extent of regulatory alignment with the EU.
Some speculate that the new shape of the UK’s electoral map could have lasting consequences for the Conservatives’ approach to these questions, and to its overall conduct of economic policy.
Tim Pitt, a former Treasury special adviser, commented on Twitter that the party’s electoral fortunes were now tied to votes in working-class areas that had been “diametrically opposed to Thatcherite economics” — so it would now contain “significant new forces . . . unlikely to endorse the low tax, small state, free market principles that have dominated Conservative economic thinking since 1975.”
But Nick Macpherson, the former Treasury permanent secretary, held out less hope of substantive new thinking. “Few governments are good at multitasking . . . don’t expect far sighted decisions on the economy and public finances,” he said, adding that trade negotiations and the renewed question of Scottish independence could “crowd out other activity for years to come”.
