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When a chancellor quits, we should all be unsettled

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When a chancellor quits, we should all be unsettled Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. In the many years I have been doing this job, two chancellors, John Major and Gordon Brown, have left their post to move onto greater things; becoming prime minister Two have lost therole of chancellor as a result of election defeats for the governing party; Kenneth Clarke and Alistair Darling. Three have been sacked, sometimes after being offered demotions; Norman Lamont, George Osborne and Philip Hammond. Only two, however, have resigned and, curiously enough, both did so over the question of advisers. Nigel Lawson resigned in October 1989 because Margaret Thatcher

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When a chancellor quits, we should all be unsettled

Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

In the many years I have been doing this job, two chancellors, John Major and Gordon Brown, have left their post to move onto greater things; becoming prime minister Two have lost therole of chancellor as a result of election defeats for the governing party; Kenneth Clarke and Alistair Darling. Three have been sacked, sometimes after being offered demotions; Norman Lamont, George Osborne and Philip Hammond.

Only two, however, have resigned and, curiously enough, both did so over the question of advisers. Nigel Lawson resigned in October 1989 because Margaret Thatcher refused to rein in her economic adviser Sir Alan Walters. Sajid Javid resigned on Thursday, honourably, because Boris Johnson wanted him to get rid of his advisers, the most blatant Downing Street Treasury power grab I can remember.

It would be going too far to say I shall miss Javid, because he had been chancellor for such a short time, and one of the few in history never to have presented a budget, the last being Iain Macleod in 1970, who died before being able to do so. Javid knew the significance of that – a bit like a footballer declaring himself unable to play just before a World Cup final – so his decision to step down was a big one. He came close to presenting a budget in November but was scuppered by the election announcement. He expected March 11 to be his day. He was, additionally, well-liked by Treasury officials.

His signature policy, pursued over many years before he became chancellor, was to take advantage of low bond yields to borrow to invest, which I discussed with him. He will no longer be there to announce the £22bn a year of extra infrastructure spending that he promised, but that policy should be pursued by his successor, Rishi Sunak, who as Treasury chief secretary (the minister in charge of spending) has already been closely involved with it.

So there should be continuity on infrastructure spending but other things may be different. After all, Johnson and his chief adviser Dominic Cummings – who is the opposite of an eminence grise – did not want to get rid of Javid’s advisers just for show.

Markets have concluded that Javid’s departure means that the fiscal boost in next month’s budget will be bigger, even at the expense of bending or breaking the fiscal rules, or coming up with new ones. We have been here before, though not usually so soon after an election. No doubt John McDonnell, Labour’s shadow chancellor, condemned by the Tories for fiscal irresponsibility just weeks ago, will be watching with interest. He is now onto his fourth Tory chancellor.

I discussed here last week how tight rules for day-to-day spending, implied by the policy of balancing the so-called current budget, sat badly along the planned big increase in infrastructure spending. You cannot have the latter, without some more of the former.

It is reasonable for markets to conclude that Javid’s departure means a looser fiscal policy. Sunak is a fiscal conservative but the circumstances of his appointment, and the clear desire of Downing Street to take more control of the Treasury, means that matters may not entirely be under his control. Either in the budget or in the spending review planned for later this year, we may see a stronger “austerity has ended” theme than Javid was planning, in other words more day-to-day spending.

We may also see greater unpredictability. In recent days there has been speculation about tax-raising measures in the budget to hit the better off, as part of the “levelling up” agenda. They include a “mansion tax” levied at say 0.5% of a property’s value and limiting pension tax relief to the basic rate of income tax.

It may have been kite-flying, and there has been plenty of wind around for that. Or softening up: threaten a wealth tax and people are relieved when you only trim pension tax relief.

One sensible thing to do would be to introduce new council tax bands for higher-valued houses, ending the absurdity whereby a modest house in Durham can pay more tax than a mansion in Kensington. Another would be to phase out the biggest anomaly in the pension system, the 25% tax-free lump sum. The justification for pension tax relief is that people pay in on untaxed income but are taxed on their pension income when they take it out. The tax-free lump sum sticks out like a sore thumb in that.

There may be nothing on tax but more on spending, and on borrowing, at a time when the budget deficit is already back up to around £50bn a year.
There will also be more uncertainty. When Downing Street seriously contemplates a bridge between the British mainland and Northern Ireland, crossing Beaufort’s Dyke and its estimated 1m tonnes of dumped munitions, you know that it is no stranger to silly ideas. It could easily become ministry of them, but now with tight control over those manage the spending taps, the Treasury.

The reason those tax stories ran more than they might have deserved is that with this government nobody really knows where blue-sky thinking ends and serious policy begins. Tory governments do not normally bite the hands that feed them by hitting traditional supporters with post-election tax hikes. This one might, though the tax burden is already at its highest since the 1980s.

That unpredictability, allied with the desire for a new headline every day, means that business is not getting what it had hoped for by now; calmer waters. The Tories have a large majority and have delivered formal Brexit but we are a long way from the stability those two developments should have implied. The reshuffle was an accident of Downing Street’s own making. The upshot of it, and Javid’s departure, is that we are even more in the dark about what the government has up its sleeve.

When Downing Street seeks to ride roughshod over the Treasury is usually ends badly, as Lord Macpherson, its former permanent secretary has observed. The risk is that it is the modern equivalent of kings debasing the currency. Even with the Treasury’s restraining influence the government has run up a lot of debt in recent years. Without it, who knows?

Johnson will probably escape the fate of Thatcher who, little more than a year after the resignation of her chancellor, was gone herself. Lawson’s departure was a reflection of a 10-year government starting to come apart at the seams. This one has only just started. But the resignation of a chancellor is never goods news, for the government or for the country.

When a chancellor quits, we should all be unsettled
David Smith
David Smith is economics editor of The Sunday Times. His website is http://economicsuk.com . His latest book is Something Will Turn Up.

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