Theresa May and Chancellor Philip Hammond have both scrapped George Osborne’s plan to abolish the budget deficit by 2020, giving them room to hike borrowing – potentially by as much as £50bn in the next financial year, reports The Telegraph.
“Economic uncertainty is high following the UK’s vote to leave the EU,” said HSBC’s Simon Wells and Liz Martins.
“In the current environment, the case for public investment is compelling. Interest rates can’t go any lower, uncertainty is extreme and borrowing is cheap. Moreover there is evidence that fiscal multipliers (i.e. the GDP impact of fiscal stimulus) are larger when the economy is in a slump.”
Early indications since the Brexit referendum are that British consumers remain upbeat, but companies are more cautious – unemployment fell in July and retail spending jumped, but surveys of businesses show they are pessimistic about the economy’s future.
The Bank of England stepped in at the start of the month to cut interest rates to a new record low of 0.25pc, but it has little room to do more.
Instead, if the economy does slow down as expected, the government could open the spending taps.
Mr Wells and Ms Martins suggest investing in areas such as transport could help increase the UK’s long run economic potential, as well as providing a short-term boost by increasing spending and hiring on the projects.
Other policies could include scrapping the recent hike in stamp duty for landlords as well as encouraging house building by cutting red tape and giving more grants for the construction of affordable homes.
An instant boost could also be given to households by cutting VAT.
HSBC anticipates any stimulus plan adding £50bn to the government’s deficit next year, an increase of 1pc of GDP.
“Having said that, we don’t think the May government will throw caution to the wind completely. Theresa May said in her first Prime Minister’s Question Time that her government would still target a surplus, just not necessarily by the end of this parliament,” the economists said.
“And she was keen to put some distance between her own stance and that of Labour leader Jeremy Corbyn: ‘He calls it austerity. I call it living within our means’.”
