Britain's Chancellor of the Exchequer Sajid Javid arrives at the Conservative Party headquarters in London, the UK, November 4 2019. Picture: BEN STANSALL / AFP
Britain's Chancellor of the Exchequer Sajid Javid arrives at the Conservative Party headquarters in London, the UK, November 4 2019. Picture: BEN STANSALL / AFP

London  —  Boris Johnson and Jeremy Corbyn escalated their spending pledges on Thursday, drawing election battle lines with plans to end a decade of UK austerity.

Chancellor of the exchequer Sajid Javid said on Thursday he would jettison the existing fiscal rules, allowing the Conservative government to devote an extra £20bn (about R377bn) a year to capital projects such as railways and roads if Johnson’s party is re-elected.

That commitment was immediately dwarfed by shadow chancellor John McDonnell, who promised an additional £55bn a year in the first term of a Labour government — more than double the current plan in Corbyn’s party.

The pledges, made in separate campaign speeches in northern England, fuelled concern of an arms race of giveaways as leaders make good on vows to end the fiscal restraint that has alienated voters in poorer regions.

For investors, the promised UK spending plans were overshadowed by signs of a thaw in US-China trade relations and a warning from Bank of England governor Mark Carney that risks to the economy are mounting. Gilts, or UK government bonds, declined and the pound weakened.

The Resolution Foundation, a UK research institute, says Britain is heading for 1970s levels of government spending, whoever wins the election, with Labour looking more profligate than the Tories.

“The economic plans set out by Labour and the Conservative parties today represent a dramatic shift from the narrow debt-driven debate that has dominated the past decade,” said James Smith, research director at the London-based group.

Some in the markets have also begun to sound the alarm. Henderson Rowe’s head of research, Artur Baluszynski, said last week he would worry about a crisis of confidence from foreign investors if a wave of additional spending was unleashed, particularly under a Labour government. Bank of America Merrill Lynch sees the market as “vulnerable.”

‘Fantasy economics’

Javid sought on Thursday to cast the election as a choice between responsible investment under the Conservatives and the “fantasy economics” of the opposition.

His new rules commit the government to balancing the day-to-day budget in three years and limiting net investment to 3% of gross domestic product. Debt, he promised, would be lower at the end of the next parliament than it was at the start.

The announcement ended months of speculation over what would replace the current fiscal rules, which require structural borrowing to be kept below 2% of GDP in 2020/2021. Javid will almost certainly breach that ceiling after announcing an extra £13.4bn of spending on public services in September.

The chancellor said low interest rates mean it is now a responsible time to increase investment from the long-term average of less than 2% as he held out the prospect of a “decade of renewal”. Investment plans would be reassessed, however, if debt-servicing costs rose significantly.

Labour also committed to keeping the current budget in balance. Under its plan, new investment would rise to about £100bn a year, from £47bn in 2018/2019.

While Labour would build on the Conservatives’ plans for non-investment spending, they would  pay for this with tax increases. The Tories, meanwhile, have said they would  deliver about £20bn of cuts to payroll taxes.

With assistance from Charlotte Ryan.