Matthew Lynn

    Things are about to get even worse for Boris Johnson

    Things are about to get even worse for Boris Johnson
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    A round of tax cuts? A splurge of infrastructure spending? Or perhaps a whizzy way of subsidising housing? Boris Johnson could even decide to forgive student debts, and hand out a massive Christmas bonus for pensioners, craftily dressed up as a cost-of-living rebate. 

    There are no doubt lots of such ideas being kicked around in Downing Street today to relaunch the Johnson premiership and save Boris's skin after a huge rebellion by Tory backbenchers. But here’s the problem for the PM: the economy is about to turn toxic. The dismal reality is that Boris isn’t going to be able to spend his way out of this scrape.

    Instead Johnson will have to come up with something else – that doesn't cost much money – to relaunch his premiership if he is to do anything more than limp on for a few more months until he is finally replaced. And yet whatever ruse he comes up with, he will have to do so against a backdrop of an economy that is getting worse and worse all the time. 

    Inflation is still rising, hitting an alarming nine per cent last month, but there is no reason to suppose it will necessarily stop there. Prices are rising by 20 per cent annually in Estonia, and by more than ten per cent in the Netherlands. As price rises outpace wage hikes, living standards are about to get crushed. That bleak scenario can already be seen materialising in falling retail spending. The reality is that people are shopping less because they feel poorer.

    Even worse, sterling is still falling, touching $1.24 against the pound yesterday. As the UK’s economy shrinks, and its political system looks more and more dysfunctional to global investors, it is likely to keep on falling. That will push inflation even higher, especially for oil and gas (both priced in dollars and mostly imported). 

    To make matters bleaker for Boris, the Bank of England will soon have to start significantly raising interest rates, hurting home owners as fixed rate deals expire. Perhaps most significantly of all, a gathering recession across the euro-zone, with industrial output already tumbling in Germany and France, could soon hit. That will only increase the pressure on the UK economy. Very soon tax revenues will be falling and benefits spending rising, as always happens in a downturn. The Chancellor will have to start spending less, not more. It adds up to a toxic combination that will hardly make the Prime Minister more popular.

    Johnson – whose default approach is to splash the cash – can’t spend his way out of trouble this time. The money simply won’t be there. And any attempt to borrow it – or get the Bank of England to finance it with another round of quantitative easing – will only make the problem worse by driving the pound even lower. It is also too late now for any structural reforms to work in time to save the PM. If Boris had started on a round of tax cutting and deregulation on winning a big majority in 2019 it might be bearing fruit by now, and he wouldn’t be in such a mess. Yet the time for that has already expired. 

    If Johnson is ousted, there will be many explanations for his demise. But a crashing, toxic economy will be the main one – and it is too late to do anything about it now.

    Written byMatthew Lynn

    Matthew Lynn is a financial columnist and author of ‘Bust: Greece, The Euro and The Sovereign Debt Crisis’ and ‘The Long Depression: The Slump of 2008 to 2031’

    Topics in this articleEconomyMoneyPolitics