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The Cabinet reshuffle suggests we should prepare for an expansive, confident Budget

George Trefgarne provides his view on the cabinet reshuffle and the upcoming Budget.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

As is so often the way, media speculation about the Cabinet reshuffle proved wide of the mark. Instead of something low key, it was a throwback to the 1980s, when Margaret Thatcher regularly culled Cabinet Ministers, including Chancellors of the Exchequer who would not do her bidding.

The rest of the country are going to have to get used to what poor old Sajid Javid had to learn the hard way. Boris Johnson has an 80-seat majority and a somewhat bare-knuckle operation in No.10 Downing Street. Under the British system, at this point, his authority is pretty well absolute. There is not much point questioning it, and certainly no point in picking fights in the press, unless you are prepared to get roughed-up.

This is a big change over the last decade, where Prime Minister after Prime Minister seemed in a state of perpetual compromise, dependent on the Treasury (among others) for approval.

What is Mr Johnson going to do with this authority? The last two weeks have proved instructive. He has taken us out of the EU, as he promised, and announced two very big policies, both of which imply big spending by the Government. The first was the banning of the sale of new diesel, petrol and hybrid cars from 2035 onwards, necessitating, among other things, a substantial upgrade of our entire energy infrastructure. The second was the approval of the HS2 railway, accompanied by an additional £5bn for the bus network.

The new chancellor, 39-year-old Rishi Sunak, is the very bright and personable son of Hindu parents, who emigrated to Southampton from East Africa. His father was a GP and his mother a pharmacist. He has made his own way in life, including to Oxford and Stanford University, started his career at Goldman Sachs and was subsequently a partner in a hedge fund called TCI.

He succeeded William Hague as MP for Richmond in Yorkshire, and not only voted for Brexit he wrote a paper on freeports - tax-free zones which would allow depressed maritime areas to attract new investment - which Mr Johnson much-liked.

How will he be different to Mr Javid? Inevitably, he will be more in tune with the Prime Minister’s expansive, optimistic, confident outlook for the country. Could we see talk that there could be nasty tax rises in the pipeline, including abolition of the higher rate allowance for pension contributions, die down, at least for now?

Mr Javid said he would introduce two new fiscal rules. The first was to spend no more than 3% of GDP on infrastructure, the second to balance the current budget, i.e. day-to-day-spending, by the middle of this Parliament, in 2023. These were in fact very similar to the so-called Maastricht criteria, which limits Government borrowing in the euro zone.

Boris Johnson is not by nature a tax-raiser and nor does he have much patience with things like fiscal rules. We should assume that Mr Sunak will be expected to take a more flexible approach to spending demands from No.10.

Is this a problem? The currency market did not seem to think so, with the pound rose back through $1.30 on his appointment yesterday. With interest rates at record lows and economic growth coming in at zero per cent in the fourth quarter of last year, there is a reasonable argument that now is just the time for the Government to borrow to invest and to stimulate the economy. No wonder the gilts market took fright, with 10-year yields jumping from 0.38% to 0.64%.

As Hargreaves Lansdown’s recent survey showed, investor sentiment for the UK has generally recovered dramatically since the election. That said the gilts market evidently thinks deficit-financed spending is now in store and it may well be right.

On the letterbox in the front door of No.10 it says: “Prime Minister and First Lord of the Treasury”, a reference to the historic role of the Prime Minister in overseeing the Chancellor as he oversees the public finances.

The Budget on 11th March will now be written jointly by 10 and 11 Downing Street and we should expect it to be an expansive, confident, high-spending, tax-cutting, typically Johnsonian affair. It will require all Mr Sunak’s attention to detail and City experience to make it look like the numbers miraculously add up, sometime in the future. No doubt Mr Johnson is confident about that too.

George Trefgarne is CEO of Boscobel & Partners, a political consultancy

This article is not a personal advice or a recommendation to trade any investments or currencies mentioned. Hargreaves Lansdown may not share the views of the author.

HL is not expressing a view on the merits or otherwise of any of the policies or any of the political parties, and nothing in this note should be taken to be an endorsement or recommendation of any particular party, candidate or policy.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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