United Kingdom to embark on Public Spending of £1 trillion in a bid to spur growth

  • Feb 24, 2020 GMT
  • Team Kalkine
United Kingdom to embark on Public Spending of £1 trillion in a bid to spur growth

Several media reports doing the rounds in the United Kingdom suggest that the Boris Johnson government may be planning on as much as £1 trillion of public expenditure in forthcoming years. The spending, among other things, is meant to spur growth in a weakened economy that has been battered severely in the past couple of years because of the Pre-Brexit jitters. Other than that, the country also wants to come out of the European Union frame of thinking which entailed lower public spending and lower fiscal deficit as a way to ensure financial prudence.

The Boris Johnson government, which had come to power on the poll plank that the United Kingdom was stagnating under the European Union regime, had promised drastic measures to bring employment and growth back to the country. During the Pre-Brexit days, the government was on an austerity drive trying to save money in every way possible. Several major infrastructure projects were slowed down as a result leading to massive cost and time overruns. During the Pre Brexit days, monetary policy measures were not very helpful arresting the economic downfall either. The constant state of political and economic turmoil had made the business sentiments in the country so choppy that no one was willing to venture out. The loose monetary policy followed all through the pre-Brexit period did not help to achieve much. Instead, by the end of 2019, the country was in such a state that reducing interest rates any further could have put the country in a liquidity trap. Perhaps on account of the country’s good fortunes, the economic conditions in the country started to improve by the first month of 2020 prompting the central bank not to cut rates any further.

The biggest problem that had marred the country in the pre-Brexit period was the lack of adequate budgetary policy measures that should have accompanied the monetary initiatives being undertaken by the Bank of England. The inability of the government to agree on a deal with the European Union regarding the orderly Brexit withdrawal for a long time proved to be the biggest policy anticlimax that the country could have expected. The inaction of the government, in addition to the constant bickering of policymakers from both sides, also meant that significant amount of time and energy of the policymakers was wasted in the process. Whatever policy measures were announced by the government were either too focused towards specific sectors or were grossly inadequate to bring about any significant growth impact. When Prime minister Boris Johnson won the general elections with a comfortable majority, the economy responded immediately as the people saw this as the first sign of certainty and predictability in the country’s economy. The Prime Minister had first come to power by promising to complete the withdrawal by 31 October 2019, with or without a deal, as delaying the deal was adding to the uncertainty and harming the economy more. Though he couldn't stop the tentative date from being extended yet one more time till 31 January 2020, two important things were achieved till the election results were announced. The first was the passing of the Benn Act that ensured that the United Kingdom did not withdraw from the European Union without a deal and second, the draft deal entered into by Prime minister Johnson with European Union officials became a law and did not receive the same fate as the draft deals entered into by the erstwhile Theresa May government with the European Union which failed to find support with the British Parliament.

Policy measures taken up by the Boris Johnson Government are thus long overdue and perfectly timed as the country is about to start a new leaf of independent economic policy regime outside of the European Union regulations. The country, apart from the spending decision, is also on an overdrive to enter into as many trade deals as it can with as many countries in order to compensate for the advantages it lost breaking away from the European Union. The country is expecting to enter into a large trade deal with the United States, which President Trump had hinted about in the last month, as well as working hard to expand its engagement with its former colonies in South-East Asia which still contributes towards a large portion of its international trade.

Increasing public spending to such a large extent will help the country on several fronts. Not only will the large amount spent spur significant economic activity in the country leading to a massive spike in its GDP numbers but also it will be required to finance massive infrastructural spending that the country urgently requires as it moves ahead to rebuild itself  from the shadows of the European Union. The massive public spending will also provide massive employment opportunities in the British public sector, ensuring a rise in both quantity and quality of public services available for the average British citizen. The spending will also speed up several stalled and decelerated public infrastructure projects which are currently reeling under severe time and cost overruns. The spending while directly encourages growth in the service sector of the economy will also spur growth in the manufacturing sector, but with a lag.  The ensuing growth, however, will be more associated with the internal economy of the country and less with its external sector (imports and exports).

There are, however, certain pitfalls with such a large public spending programme. The first and the foremost being an increase in the fiscal deficit. To finance such a large expenditure purely based on tax revenue is not possible without structurally damaging the economy; the only option left for this will be increasing the government's borrowings. In short to mid-term, thus, the economy will become risk-prone and the sovereign ratings will come down. The second danger is that of such a large amount of public expenditure crowding out of private investments, which could harm the growth and development of the private sector of the economy and that too of the small and mid-sized domestically focused companies compared to multinational corporations.

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