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Boris: big on development, bigger on borrowing

By Toby Fildes
25 Jul 2019

Boris Johnson, the UK's new prime minister, has spent most of his first week in power making life difficult for his new chancellor. Announcing big investments in transport infrastructure, health and social care in his first speech on the steps of 10 Downing Street, Johnson is already racking up the bills.

His first speech was followed by his first parliamentary outing a day later. This turned out to be another vocal spending spree, with the PM enthusiastically backing the pleas from MPs of all parties for investment in new hospitals, schools, motorways, railways to Clacton-on-Sea, gigawatt battery plants and housing. There was not very much he turned down. He has since backed the Northern Powerhouse rail link. 

Such enthusiasm for saying yes to everything is understandable — the novelty and excitement of ultimate political power is champagne for the brain. He was particularly enthusiastic about setting up a new UK development bank, that could operate along the same lines as Germany's KfW and finance UK infrastructure through big international bond programmes. 

Such an idea is not new of course — former prime minister Gordon Brown was keen on it, as was former chancellor George Osborne. Its current torch bearer is Jeremy Lefroy MP, who hopes his constituency will host the aforementioned gigawatt battery plant. Meanwhile Labour, the UK's opposition party, is also keen on setting up a national development bank that could borrow up to £230bn over a 10 year period.

Now, Johnson knows that he can say quite a lot and get away with not doing it. Parliament is in recess until September 3 meaning there is very little time for anything to pass into law or for projects to be officially commissioned and financed, with the country's Brexit date due on October 31. Some think these pledges are for the purpose of a new general election campaign. 

But with the Conservatives and Labour both onside, a national infrastructure bank might just be something that sticks. And high time too. 

The irony is that, if it is finally created and in need of funding, it will be going to market at quite possibly the worst time. A hard Brexit — something Johnson says he will go through with unless he can strike a new withdrawal agreement with the European Union — will be damagingly expensive. According to the government itself, it could cost the exchequer £90bn

This would no doubt have implications on the UK's creditworthiness and make borrowing a lot more expensive and uncertain for the UK's shiny new development bank. One of KfW's great advantages, lest we forget, is that it is guaranteed explicitly and directly by the Federal Republic of Germany — Europe's benchmark borrower — and so qualifies for triple-A rating which means it can borrow exceptionally cheaply. 

Enthusiasm can only get you so far.

By Toby Fildes
25 Jul 2019