U.K. Tory Rivals Offer Giveaways Even Socialists Call Reckless

(Bloomberg) -- For decades the British Conservative Party has prided itself on being trusted with money. Now the two men vying to become the next prime minister face accusations they are putting that reputation at risk.

Boris Johnson and Jeremy Hunt are promising voters a tax-cutting and spending spree that is sparking growing concern. Chancellor Philip Hammond, a fellow Conservative, says they are not being honest about the consequences for borrowing.

Of the two candidates, Hunt is pledging the most. If delivered, his commitments would make him barely less extravagant than the opposition Labour Party, which before the 2017 general election said it would increase spending by 48.6 billion pounds ($61 billion) to reverse austerity -- to be paid for with tax increases.

Even John McDonnell, Labour's economic spokesman, has described the Tory pledges as “reckless,” saying they will “put the economy at risk.”

On Monday, Hunt unveiled a 6 billion-pound ($7.6 billion) plan to help farmers and the fishing industry prepare for a no-deal Brexit, adding to commitments that include:

• Slashing corporation tax to 12.5%, costing 13 billion pounds a year
• A 15 billion-pound annual increase to defense spending by 2023-24
• Raising the threshold at which people start paying national insurance, a payroll tax. The increase could cost as much as 17 billion pounds, according to the Institute for Fiscal Studies

Johnson seemed to row back on a pledge to end a public-sector pay freeze which had been announced earlier in the day by his supporter, Health Secretary Matt Hancock. Like Hunt, he's promised to raise the national-insurance threshold. He's also vowed to:

• Increase the amount people can earn before they start paying income tax at the higher 40% rate to 80,000 pounds from 50,000 pounds. Estimated cost: 9 billion pounds
• Increase spending on police officers, costing around 700 million pounds
• Raise social-care funding by 1%, costing about 160 million pounds
• Spend an extra 1% on roads, costing 100 million pounds

The pledges are “extraordinary,” said Paul Johnson, director of the IFS. He rejected both candidates' claims that the money would come from the war chest Hammond built to buffer the economy in case of a no-deal departure from the European Union.

“That's only available in the event of no deal not happening and in any case, what they're just saying is they'd be willing to borrow more and borrow more into the long term,” he said. “They've told us nothing about how much more they're willing to borrow.”

Fiscal rules require that the structural budget deficit is no more than 2% of GDP in 2020-21. It is forecast to come in 26.6 billion pounds below the ceiling but the headroom will fall to 15 billion pounds once the reclassification of student loans takes effect later this year. Economists say a no-deal Brexit would more than wipe out either margin.

“I have no doubt we will need all that money and more to respond to the immediate impacts” of crashing out of the EU without a deal, Hammond told lawmakers Tuesday in what may be his final question-and-answer session in Parliament.

Hammond cited cross-government analysis published last year that showed the public finances would take a 95 billion-pound hit by 2035-36 in a disruptive no-deal Brexit scenario.

Legacy Threat

With talk of a possible general election this year, fiscal conservatives such as Hammond are concerned the largesse on offer will make it harder to portray Labour leader Jeremy Corbyn as reckless.

Britain's budget deficit has fallen from almost of 10% GDP in the aftermath of the financial crisis to 1% last year. But austerity has proved painful for millions, and Hammond fears those sacrifices at now at risk of being squandered. He's been reluctant to allow Prime Minister Theresa May to burnish her legacy with spending commitments on the environment and education.

“My concern is that this government has built up a reputation for fiscal responsibility and the British people have worked incredibly hard over a decade now to rebuild our public finances and I think it's very important that we don't throw that away,” he said this week.

To contact the reporter on this story: Jessica Shankleman in London at jshankleman@bloomberg.net

To contact the editors responsible for this story: Tim Ross at tross54@bloomberg.net, Andrew Atkinson, Brian Swint

©2019 Bloomberg L.P.